When private sector companies become distressed, an entire ecosystem of experts springs into action. Turnaround specialists swoop in to replace management teams, cut spending, and negotiate with creditors. A sophisticated set of tools is deployed with vigor, much like triaging patients in hospital emergency rooms. Identifying which companies will survive has enriched many a bond investor, and executives experienced in navigating workouts are highly sought after.
The question of solvency is rarely clear-cut, and filing for bankruptcy is often a strategic decision. Companies can remain insolvent for some time but never file, while others seek court protection long before all options are exhausted. Deciding if and when to act is more art than science, as demonstrated by the divergent paths chosen by Ford and General Motors during the global financial crisis. The former, you may recall, had borrowed every penny it could before the crash and avoided bankruptcy; the latter used bankruptcy to right itself.
By any measure, the current U.S. fiscal situation is highly distressed. Total public debt outstanding exceeds $36 trillion, double what it was just a decade ago and more than 120 percent of gross domestic product (GDP). Annual interest expense is set to surpass a staggering $1 trillion. The federal deficit was $1.8 trillion for fiscal year 2024, or 6.4 percent of GDP. Respected analysts argue the U.S. is already in what’s called fiscal dominance, defined as “an economic condition that occurs when a country’s debt and deficit levels are sufficiently high that monetary policy ceases to be an effective tool for controlling inflation.”
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