Tighter bank lending standards and slowing economic growth could push global speculative-grade default rates as high as 5.5 per cent by mid-2008, up from 1.48 per cent currently, Barclays Capital said on Friday.
"When you do get a tightening of lending standards, you do certainly get a slowdown in the economy and that in turn starts to put pressure on corporates [corporate bonds]," Robert McAdie, Barclays Capital's global head of credit strategy, said on a Barclay's conference call.
If tight bank lending conditions persist, the default rate in the United States will likely rise to 6.9 per cent from 1.5 per cent currently, and in Europe to 7.75 per cent, up from 2.9 per cent, McAdie said. The global rate will likely reach 4.5 to 5.5 per cent, he said.
Barclays' prediction is in sharp contrast with forecasts made earlier last week by credit strategists at JP Morgan and Moody's Investors Service.
"Barring an outright recession, we do not expect a material rise in the default rate over 2008," said Daniel Lamy, a credit strategist at JP Morgan, in a note to clients. "We could be looking at defaults in the region of 1.5 per cent again next year."
JP Morgan argued, for instance, that leveraged borrowers in Europe had already locked in financing and did not need to borrow to repay debt.
"The transmission mechanism from weaker growth to a higher number of defaults could be more elastic than in previous periods," Lamy wrote.
Moody's Investors Service forecast that the global default rate would rise to 3.5 per cent over the next 12 months from 1.3 per cent currently and the US rate to 3.9 per cent from 1.2 per cent.
Though a half percentage point rate cut by the US Federal Reserve last month helped the credit markets turn a corner, "I am strongly of the view that we are not out of the woods," McAdie said.
"Money market dislocation still persists; the asset-backed market still remains shut," he said.
The asset-backed market supported the extension of credit to consumers over the last five to 10 years, and with that market shut, "the availability of credit is going to continue to dwindle," he said. "That is going to have greater impact across the board."
The credit market is in a lull now, but risk premiums will rise going into 2008, he said. ( Reuters )