The chief executive of the biggest US bank is sounding the alarm on the serious risks of America’s mounting debt.
In a letter to shareholders, JPMorgan Chase chairman and CEO Jamie Dimon says the US government needs to promptly address its debt problem before the situation could balloon into a crisis.
“High and increasing government debt will eventually have to be dealt with — the right way would be to deal with it now before it becomes a problem; the wrong way would be to let it become a crisis, which, in my opinion, is probably the likely outcome.”
Dimon issues the warning amid what he says is high global sovereign deficits and debts.
“Global deficits are significantly elevated, particularly during what has been a relatively healthy global economy and, until recently, a time of peace — the deficit globally is at an extremely high 5%, while global sovereign debt is at all-time highs. The current forecast from the Congressional Budget Office has our debt-to-GDP ratio going from 100% today to 120% in 2036.”
Dimon says the credit cycle downturn that will happen one day will cost higher than expected losses on all leveraged lending in general.
“This is because credit standards have been modestly weakening pretty much across the board; i.e., more aggressive and positive assumptions about future performance (called add-backs), weaker covenants, more use of PIK (payment-in-kind; not paying interest in cash but accruing it), more aggressive private ratings (particularly in insurance companies) and more arbitrage (not always a great sign).”
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