Corporate debt levels slashed

Companies have successfully cut their debts during the recession and reduced their exposure rising interest rates. The Confederation of British Industry said yesterday that a 1 per cent rise in base rates now cost companies around £500m a year in extra debt interest, compared with £750m a year in 1990.

Companies doubled the ratio of their gross debt to annual income during the eighties from around 80 per cent in 1980 to 170 per cent in 1990. Since then they have reduced the ratio again to around 110 per cent. Big companies have done so by aggressively paying off borrowings, issuing shares, and by cutting back on investment programmes. Many have also built up substantial cash piles which are not included in the debt ratios. Small companies have reduced their gross and net debt equally dramatically, although in many cases they have had to cut back involuntarily because banks have pressured them to reduce their overdrafts.

Personal borrowers also took advantage of the deregulation of credit during the Thatcher years and doubled the ratio of their gross borrowings to income from around 50 per cent in the early eighties to a peak of 110 per cent in 1991. It is still over 100per cent.

More than 80 per cent of mortgages and most overdrafts are on variable interest rates, which are directly exposed to a rise in base rates. Many people have substantial sums on deposit, however, which will eventually benefit from rising rates.