Analysts at S&P Global warned on Monday that U.S. corporate default rates could soar if the economy slips into a “shallow recession.”
US corporate default rate could reach 3.75% by September 2023 if hawkish Fed rate hikes trigger a shallow or mild recession, according to S&P Global Ratings There is a possibility.
In a much worse scenario with a deeper recession, default rates could reach 6%, the highest since March 2021, analysts say.
“If a recession does occur, it will largely depend on its length, width, depth and whether the Fed continues to raise rates throughout the recession,” analysts at S&P said on Wednesday. “The current pace of yield expansion in the secondary market will continue, but consumption will contract and businesses will be forced to dig into their cash holdings to weather a deeper recession.”
Elsewhere on Monday, Deutsche Bank said default rates on U.S. leveraged loans (those banks make to companies and individuals with significant debt) will hit a near-record 11.3% in 2024. announced that it will reach reaches 7.1%.
Banking analysts said the U.S. economy is likely to slip into recession in the second half of 2023, with corporate profit margins taking a big hit, resulting in delayed interest payments and higher default rates. .
However, Deutsche Bank does not expect default rates to spike in 2023.
The Fed may need to raise interest rates
The warning came shortly after St. Louis Federal Reserve Bank Governor James Bullard warned that the Federal Reserve may need to raise interest rates by as much as 7% to cool down rampant inflation.
Doing so increases the cost of debt for Americans, including credit card debt, mortgages, and car loans.
At an event in Louisville, Kentucky on Nov. 17, Bullard said the central bank’s tightening policy so far “has had a limited impact on observed inflation. , market prices suggest we expect disinflation in 2023.”
But Bullard said ultimately the final decision on rates fell to Fed Chairman Jerome Powell.
“If we do more now, we will do less in the first quarter. [of 2023]If there isn’t much work to do today, we have more work to do in the first quarter. Generally speaking, from a macroeconomic perspective there probably won’t be much of a difference,” he added.
In November, Fed officials unanimously launched a rate hike of 75 basis points, setting a target range of 3.75% to 4.00%. This will be his sixth rate hike this year, and 2022 will see him raise rates by 75 points in a row for the fourth time.
The Commission is scheduled to meet again on December 13-14 for its final meeting in 2022, and analysts are widely expecting a rate hike of 0.50-0.75 per cent.
Bryan Jung contributed to this report.
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Katabella Roberts is a news writer for The Epoch Times, focusing primarily on US, world and business news.
