Corporate defaults may multiply even in a moderate recession, warns S&P Global

By Katabella Roberts via The Epoch Times,

S&P Global analysts warned Monday that the corporate default rate in the United States could rise if the economy slips into a “shallow recession.”

According to S&P Global Ratings, the default rate for US companies could reach 3.75% by September 2023 if the Federal Reserve’s aggressive policy of raising interest rates leads to a shallow or moderate economic contraction.

In a much worse scenario of a more serious economic downturn, analysts said, default rates could reach 6 percent, the highest since March 2021.

“Much will depend on the length, width, and depth of a recession if it occurs, and if the Fed continues to raise interest rates during the recession,” S&P analysts wrote Monday.

“The current pace of expanding yields in secondary markets will continue, while consumption will contract, forcing companies to dig into their cash holdings to get out of a deeper recession.”

Elsewhere on Monday, Deutsche Bank said default rates on US leveraged loans — those made by banks to companies or individuals with significant debt — will reach a near record high of 11.3 percent in 2024, while defaults for Repayments on leveraged loans in euros will reach 7.1 percent.

Analysts at the bank said that the US economy is likely to slip into recession in the second half of 2023, and companies will take a big hit on their profit margins resulting in non-payment of interest payments, which leads to an increase in default rates.

However, Deutsche Bank does not expect default rates to rise in 2023.

The Fed may have to raise interest rates even higher

Warnings come soon after James Bullard, president of the Federal Reserve Bank of St. Louis, warned that the Fed may have to raise interest rates by as much as 7 percent in order to calm severe inflation.

Doing so increases the cost of debt for Americans, including credit card debt, mortgages, and auto financing, among others.

Speaking at an event in Louisville, Kentucky, on Nov. 17, Bullard noted that the central bank’s monetary tightening policy has so far had only limited effects on observed inflation, but that market rates indicate an expectation of subdued inflation in 2023.

Ultimately, Bullard said the final decision on interest rates is up to Fed Chairman Jerome Powell.

“If you do more now, you won’t have much to do in the first quarter [of 2023]. If you do less now, you will have more to do in the first quarter. Overall, it probably won’t make a lot of difference in terms of the overall economy.

In November, Fed officials voted unanimously to initiate another 75 basis point increase, to the target range of 3.75-4.00 percent, marking the sixth rate increase this year and the fourth consecutive 75-point increase in 2022.

The committee is scheduled to meet again Dec. 13-14 for its last meeting in 2022, and analysts widely expect a rise of between 0.50 and 0.75 percentage points.