Europe’s near-term default rate to remain low

Despite some dark clouds on the horizon, a new S&P report predicts default rates in Europe will continue to hover around the 2% mark this year.

S&P Global Ratings estimates that the 12-month default rate for the speculative-grade European financial and non-financial corporate issuers that it rates will remain close to 2.0 percent through 2017.

This rate is close to historic lows and compares with an average 12-month trailing default rate of 3.3 percent between January 2002 and September 2016.

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

“For example, the Eurozone unemployment rate has been trending downward since mid-2013 and is now close to an eight-year low, while the European Central Bank’s bank lending survey suggests that lending standards for large firms continue to loosen on aggregate.”

However, the report noted several negative credit factors looming including rising inflation and Brexit in the UK, future US trade policy, and the outcome of elections in some European countries – all of which could put pressure on certain companies.

S&P said its ratings-based indicators of credit performance were presenting a mixed picture. While the negative ratings bias among speculative-grade European corporates has trended lower in recent months, the ratings distribution is becoming more concentrated on lower rating levels, suggesting rising aggregate credit risk.

The report said it expected indicators to remain relatively benign in the short term but that there could be greater weakness in the longer term. In a few sectors, such as oil and gas exploration and production, downgrade risk and default risk remains high by historic standards.

While a default rate of 2.0 percent is expected at the end of this year, S&P said its optimistic scenario was 0.9 percent while its pessimistic scenario was 3.2 percent.