Corporations Could Default Even In A Mild Recession

( Analysts from S&P Global warned on Monday that the rate of corporate defaults in the United States could soar even if the economy tips into a “shallow recession.”

According to S&P Global Ratings, the default rate for American companies could reach 3.75 percent by September 2023 if the Federal Reserve’s hawkish interest rate policy prompts a shallow or mild economic downturn. And if the economic downturn is more serious, that default rate could reach 6 percent, the highest rate since March 2021.

The S&P analysts explained that much of it will depend on the “length, breadth, and depth” of any recession that could occur and whether the Fed continues to raise interest rates during the recession.

Also on Monday, Deutsche Bank said default rates on US leveraged loans, the loans made by banks to companies or individuals with considerable debt, will likely hit a near-record high of 11.3 percent in 2024 while defaults on euro-leveraged loans will reach 7.1 percent.

Analysts from Deutsche Bank said the US economy will likely slip into a recession during the second half of 2023 and companies will take significant hits to their profit margins resulting in missed interest payments, thereby increasing the default rates.

However, unlike S&P, Deutsche Bank does not anticipate default rates to soar in 2023.

Last week, James Bullard, the president of the Federal Reserve Bank of St. Louis, warned that the Fed may have to raise interest rates as high as 7 percent to cool inflation. This would increase the cost of debt for Americans, including credit card debt, mortgages, and vehicle financing.

Speaking at an event in Louisville, Kentucky last Thursday, Bullard noted that so far, the Fed’s monetary tightening policy only had “limited effects” on inflation, but added that market pricing indicates “disinflation is expected in 2023.”

Ultimately, the final decision on interest rates is up to Federal Reserve Chairman, Jerome Powell, Bullard said. But, he argued, if more is done now, less will be needed in the first quarter of 2023.

The Federal Reserve will be meeting again on December 13 for its final meeting of 2022 where analysts anticipate a hike of between 0.5 and 0.75 percentage points.