Page 152 - (DK) The Business Book

150

DEBT IS THE

WORST POVERTY

LEVERAGE AND EXCESS RISK

n 2012, US theoretical noted the importance that central
IN CONTEXT physicist Mark Buchanan banks (and governments) place on
I wrote Forecast, a book inflation, interest rates, exchange
FOCUS
detailing his investigations into rates, and consumer confidence. He
Managing risk
the workings of the economy. In was puzzled by the absence of one
KEY DATES assessing the variables that affect variable that had proved a central
1970–2008 Banks in economic growth and decline, he factor in past extremes of boom and
developed countries double
the ratio of loans that they
issue compared to the value
Increasing leverage Decreasing leverage
of money they hold.
allows companies to... allows companies to...
2002 The Global Executive
Forum report on the collapse
of the Enron corporation says
that “the genius of Enron was
infinite leverage.” ...focus on growth and ...focus on increasing profit
convert short-term debt through minimizing costs
2007–08 Increasing numbers into long-term loans... and repay long-term loans...
of people access credit to
finance mortgages, but later
default on their loans. Global
financial markets collapse.
2013 The UK government ...and pay increased ...and issue more shares.
forces banks to publish their dividends to shareholders.
leverage ratios. Among the
highest leveraged is Barclays,
which has loans worth 35
times its (equity) capital base.
However, the company
However, it can leave
businesses vulnerable may fall behind rivals
who can boost growth
to cash-flow problems.
through higher leverage.