Sunday, 10 August 2008

Deflation Watch: Corporate Defaults to Rise Sharply

Financial Times: Corporate Debt Default 'Could Reach 10%'
The global default rate is expected to climb to 6.3 per cent over the next 12 months and it could reach 10 per cent should the US sink into a protracted recession, Moody’s Investors Service said on Thursday.

“The storm is gathering for default rates moving up,” said Kenneth Emery, Moody’s director of corporate default research.

Fellow rating agency Standard & Poor’s also warns that credit conditions are deteriorating. “We have long been proponents of the view that the credit euphoria of the prior boom years beginning with 2003 would necessitate a shake-out and purge,” S&P said in a recent report.

“This would result in substantially higher downgrades and defaults, concentrated in the US, but not without repercussions in other parts of the world.”


working class said...

“We have long been proponents of the view that the credit euphoria of the prior boom years beginning with 2003 would necessitate a shake-out and purge,” S&P said in a recent report.

Oh, that's rich. Considering their part in said euphoria.

No shame. Not even an ounce.

Anonymous said...

I don't know what the effect is on the individual home owner in the U.K. or Ireland when they default on their mortgage debt.

In California and many other states in the U.S., purchase money loans on a personal residence are 'non-recourse'. That is the lender can only go after the house.

Furthermore, there is no income tax liability for the loan forgiveness in this case.

As many homeowners have been forecloused upon because their financial condition could not service the debt, others are 'walking away' from their houses because they are now worth less than they owe.

In today's environment it is only natural that default that started with homeowners and home builders should spread to the rest of the economy as corporate bonds cannot be serviced by the reduced earnings of corporations dependent on consumers who purchased these goods on credit.

As the plankton dies off, the bigger fish starve.

Anonymous said...

What impact will rising credit defaults have on the USD$45 tn dollar credit derivative swaps (CDS) markets? How does this compare to the relatively benign (in comparison) failures of the RMBS and ABS sectors? Will this lead to the fulfilment of Greenspan's 1998 (LTCM era) prophesy of "cascading cross-defaults"? Have global IBs adequately provisioned for looming increases in counterparty risk? Some questions to ponder.

Knute Rife said...

The grim thing is that the spiral is now in place, its axis fully anchored. The only thing holding the CDSs and the rest of the system up is that the US Treasury is committed to throwing money into bail-outs. With Fannie, Freddie, and the FDIC queued up, though, that gravy train will soon run dry. Those worthies are enough to torpedo the US's AAA sovereign credit rating. At this point the CDSs start unwinding, and the cost of borrowing heads skyward (and there won't be anything the Fed can do about it). Then the defaults pile up like cordwood. Then we're circling the drain.

Anonymous said...

Not accurate to say that there is not tax liability for forgiven debt on mortgages. Burden of proof lies with the individual to prove to the IRS that they were insolvent. If they were not insolvent they owe appropriate INCOME tax on amount forgiven.

My guess is with tax receipts getting crushed, the IRS will start going after alllllll kinds of people, including people who weren't insolvent but walked away. Bad luck if they wait a few years before they get to you because then you'll owe late fees and interest to top it all off.


Anonymous said...

Anonymous @ 10 August 2008 19:55 a.k.a. Gamma,

Not so.

Before the recent bailout bill, a bill was passed and signed by G.W. Bush to let these home debtors off of the hook.

So for ‘No Recourse’ states such as California, no 1099 will be issued!!!!

In some states the rules are different and the individual may be subject to state income taxes, but still no 1099 will be issued!

For those of you outside the U.S., a 1099 is a form issued to show that you had taxable income from interest, debt forgiveness, and other sources not detailed in your W-2 which shows wages, etc..


Anonymous said...

Does anyone know of an open source information repository where I could find financial institutions that are heavily exposed to UK mortgages?