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Spotify layoffs reveal debt-related time bomb

Spotify layoffs reveal debt-related time bomb

According to an analysis conducted by Business Insider, rising interest rates threaten to create a situation in which many companies are unable to pay their debts to their creditors.

spotify, flow The music and podcast company founded in Sweden has decided to lay off 1,500 workers, which equates to a 17% cut in its workforce. So far nothing new. The problem is that the measure is linked to the company’s debt repayment problems, like many others that together constitute a “debt time bomb,” according to a Business Insider analysis.

To give you an idea of ​​what’s at stake, it’s all tied to an adverse macroeconomic climate, associated with rising inflation and rising interest rates at many central banks, in this case the Federal Reserve (Fed). A panorama that led to 561 North American companies declaring bankruptcy in the first ten months of 2023, according to data from S&P Global.

Looking back, higher numbers were only recorded in 2020, at the height of the pandemic.

Meanwhile, 127 people failed to make debt payments in the same period, 13% higher than the average of the previous five years.

With the Fed’s aggressive monetary policy raising interest rates to 5.5%, many companies are left with a noose around their necks, and the risk of a series of failed defaults is high, which is a concern in this context. Related to this is the risk that a default will reach a global scale, and since North America’s economy is the largest in the world, the repercussions are inevitable.

In the case of Spotify, it announced the separation and announced the need to reduce the company’s expenses, as it needs to find $1.3 billion to pay its creditors. In a message to employees, Spotify CEO Daniel Ek acknowledged that the low interest rates that characterized 2020 and 2021 allowed “significant investment in expanding the team.”

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However, the “new environment” of the economy requires measures, because despite “efforts to reduce costs”, the cost associated with employees is still “very significant”.