The European Central Bank’s low-interest policies have made this a marvelous time for companies to raise capital. But the darker side to the low-rates era is making itself felt on balance sheets: Despite decent profits, most firms’ book values and equity ratios are shrinking rapidly.
The main trigger for the trend is a drastic rise in future pension costs. The long-term decline in capital market interest rates has forced companies to earmark significantly higher sums to cover pension obligations.
According to figures released by Mercer, a corporate consultancy firm, since January, the 30 companies making up the prestigious DAX stock market index have increased their accounting liability for pensions by 20 percent, rising €67 billion to a total of €428 billion, or $478 billion. In the same period, pensions assets only rose by 4 percent, so companies have had to massively top up pension provisions on their balance sheet.