| High leverage could be dangerous in a declining market. Partially reflected in the beta estimate though. High debt means that when profits fall, the company may not be able to pay back their debt and could go bankrupt.
Debt generally affects a country the same way as a company. When debt is high, there is risk the country could default and thus not pay back the debt. The higher the debt level, the higher the risk and the more expensive debt becomes. In the case of the United States, debt levels have not increased interest payments, because the US is deemed a safe haven for investments, but this may change in the future. The banking collapse and fiscal irresponsibility may change the image of the United States (US). If China stopped buying US debt, then interest rates would increase substantially and cause the US to spend a lot of extra money to service debt. This extra money would come from increased taxes or cuts in services. - (edit / improve) |
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