Defaulting banks - where will it stop?

[Jan Klimkowski]

Ticker Forum have coined the highly descriptive phrase "bear porn" to describe this type of information coming from pillars of the financial establishment... :bandit:

A bigger proportion of non-investment grade companies will go bust in the US and overseas in the coming years than during the Great Depression, according to Moody's, one of the world's foremost experts on credit.


By Edmund Conway, Economic Editor
Last Updated: 7:42PM GMT 26 Feb 2009

In what will be seen by many as die-cast confirmation that the world economy is plummeting towards an economic and corporate implosion of unprecedented proportions, Moody's said it anticipated a tidal wave of defaults was approaching.

It said that in the coming months more than 15pc of speculative-grade bonds and loans - all but the most highly-rated - would default on their debts.

This peak is even higher than the peak reached in 1933, when bank after bank throughout America was collapsing, taking hoards of other companies with them. Back then, the default rate peaked at 15.4pc; moreover these companies were former investment grade issuers regarded as more reliable credit prospects than their contemporary counterparts.

Kenneth Emery, senior vice president at Moody's said: "The three main drivers of the forecasting model are forecasts for the high-yield bond spread and the unemployment rate, along with the current level of issuer ratings. In the fourth quarter, the high yield bond spread reached unprecedented levels; and we've got an unemployment forecast approaching 9pc this year and issuer ratings at record low levels.

"We certainly think that this credit cycle will be worse than the last two in the early 1990s and 2000s. In fact, in 2009 we expect to see the largest number of defaults since the advent of high yield bond market in the early 1980s. And the default rate for non-investment grade bonds may reach levels even higher than those registered during the Great Depression.

"There are risks here because we are in unchartered territory, but the model forecast is that roughly 15pc of our speculative-grade issuers globally will default in 2009. In Europe the forecast default rate is even higher at close to 19pc."

The report traced the health of the bond market all the way back to the 1920s, and finds that the threat of companies defaulting is more stark now than at any point in that stretch of time. It predicted that company defaults will triple this year to about 300, after 101 defaulted last year on more than $280bn of debt.

If the economy deteriorates by even more than expected, the default rate could conceivably mount to around 20pc, Moody's added - meaning around one in five of all non-investment grade issuers default, something which has never happened before. The companies most at risk of default are consumer transport groups, which largely constitute airlines, media companies and car manufacturers.

In Europe, the sectors most at risk of defaulting include those providing durable and non-durable consumer goods and business services.

http://www.telegraph.co.uk/finance/econo...ssion.html

Personally, I get a belly laugh from the financial pages of major MSM newspapers describing Moody's as "one of the world's foremost experts on credit" with an entirely straight face...