Wave of debt defaults looms over America and Europe

According to an annual study by Deutsche Bank, Germany’s largest bank, corporate defaults will become more common than they have been in the past 20 years. The bank predicts that default rates will peak in the fourth quarter of 2024. In the US, default rates will peak at 9% for high-yield debt and 11.3% for loans. In Europe, default rates will be 4.4% for high-yield bonds and 7.3% for loans.

The study found that the US loan default rate is near an all-time high. During the 2007-2008 global financial crisis, it hit a record 12%, and during the dot-com bubble of the late 1990s, it reached 7.7%.

“Our cyclical indicators signal an impending wave of defaults,” Deutsche Bank economists wrote. “The tightest Fed and European Central Bank policies in 15 years are colliding with high leverage built on persistently high yields. And tactically, our measure of the US credit cycle is sending investors the highest non-pandemic warning signal since before the global financial crisis.”

Strategists stress that the intensity and length of this cycle could be surprising. They say forecasts point to a return to the boom-bust cycle, rather than a global financial crisis-style shock.

Deutsche Bank also warned that aggressive interest rate hikes by central banks - including the Fed and the ECB, as they continue to battle runaway inflation - have increased the risk of a global recession, with Germany - the European Union's largest economy - already in recession.

“We suspect the next recession will be the first since the US tech bubble to inflict more pain on credit markets than on the real economy. Corporate leverage is rising. And global credit markets will derive more revenue from the production and sale of physical goods than from the real economy as a whole,” the experts warned.

The study found that European companies appear to have a lower risk of default than the US because they have a higher proportion of high-quality bonds. Europe also provides more fiscal support and has lower debt levels in high-growth sectors such as technology.

In Europe's high-yield bond market, real estate is the sector facing the most pressure and accounts for more than 50% of high-yield bad debt, Deutsche Bank said.

The bank noted that additional capital injections, additional European fiscal stimulus and future rate cuts could mitigate risks and avoid a worst-case scenario.

However, Deutsche Bank said the above moves could not prevent the default rate from increasing.

According to Tin Tuc Newspaper