European default rate expected to rise

While still below the long-term historical average, a new S&P report says speculative grade defaults may reach 2.5% in 2018.

A new report from S&P Global Ratings says the 12-month trailing default rate for speculative grade European corporates could rise to 2.5 percent in 2018.

This would keep the rate below the average of 3.2 percent from 2002 to 2017 but would be an increase on the last few years when the rate has hovered around the 2.0 percent mark.

“European macroeconomic trends and credit conditions continue to support a low default rate, in our view,” said Andrew South of S&P Global Fixed Income Research.

Supporting the low default rate is strong economic growth, with Eurozone GDP reaching a 10-year high of 2.5 percent in 2017 and expected to continue at more than 2.0 percent this year.

Furthermore, monetary policy remains helpful despite the ECB beginning to ramp down its asset purchase programme, with the strength of the euro helping to keep inflation below the ECB’s target level.

Debt issuance from speculative grade European corporates has increased as lending standards continue to loosen and debt funding costs remain low.

However, the default rate is expected to climb as some credit factors are more negative. More modest growth is likely in the UK as Brexit uncertainty dampens investment and currency weakness creates higher inflation, thereby curbing household spending.

S&P has also noted rising aggregate credit risk, partly due to rising corporate leverage.

While insisting that the default rate should remain low over the next 12 months, South added that “the risk of a capital markets-led tightening in credit conditions may be building and the default rate has been edging higher.”