EconomyHigh interest equals default? This is the biggest concern...

High interest equals default? This is the biggest concern of investors

Investors are bracing for a higher number of defaults around the world as corporate borrowers come under pressure from rising interest rates, according to a survey by the International Association of Credit Portfolio Managers, IACPM, for its acronym in English.

The survey, released on Thursday, revealed that 83% of respondents expect defaults to rise globally over the next year, joining a growing chorus of analysts who fear central bank rate hikes to combat the inflation hurt companies with weak balance sheets.

“Inflation is a problem in most markets and central banks are determined to curb growth to contain rising prices,” said IACPM Executive Director Som-lok Leung. “In this environment, our members fully expect defaults and losses to increase.”

The projections for Europe are worse than those for the rest of the world, with 90% of respondents expecting corporate defaults to rise.

A measure of the credit risk of US companies rose the most in a month on Thursday after the publication of unexpectedly high inflation data. Risk premiums on US corporate bonds, meanwhile, widened for a third day on Wednesday to 165 basis points, the highest level since June 2020.

And credit spreads are likely to weaken further. The outlook is more negative in Europe, where 77% of respondents expect investment-grade spreads to widen in that region, while 53% expect the same in North America.

In Europe, rising energy prices and growing fears of a recession in the UK are fueling pessimism among credit portfolio managers.

The IACPM Credit Outlook Survey is conducted quarterly among 137 financial institutions around the world. Includes portfolio managers of commercial banks, investment banks and insurance companies.

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