Home > Current Affairs, Debt, Economy > Cheap Capital and Debt

Cheap Capital and Debt

The Economist notes that a number of hotels which had taken out loans during the boom period have started to default on their debt, with the consequence that banks are starting to become proprietors of debt-ridden hotels:

Lenders to the industry are now firmly in the regret phase. Over the next year banks in Europe and America may be forced to write down billions in bad loans, further impairing already strained balance-sheets. In many cases they are also likely to become the proprietors of debt-ridden hotels.

Part of the problem with making loans to hotels is that, unlike commercial properties (which face their own difficulties), hotels don’t have years-long tenants paying rent every month; rather their “tenants” are travelers staying for undefined amounts of time. When the economy sags, those paying travelers dry up and so do hotels’ revenues and hence their ability to pay their debts.

One wonders whether hotels and their creditors would presently be in this position if capital had not been so cheap and so readily available. A surfeit of cheap capital does no industry any good.

Categories: Current Affairs, Debt, Economy
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