Will Corporate Defaults In The UK Rise As Much As Feared? by Lloyds TSB

In the Q1 2008 Bank of England Credit Conditions Survey (CCS), there was a jump in lenders’ expectations that default rates on loans would rise sharply, see chart a. The chart highlights that there was a greater number of respondents expecting defaults to increase in Q2 than in Q1, which in turn was much worse than in Q4 2007. This is the main reason there was a rise in the cost of lending, to companies and households, to compensate for the higher risk of defaults.

Financial markets are worried that UK defaults will rise sharply…

In the Q1 2008 Bank of England Credit Conditions Survey (CCS), there was a jump in lenders’ expectations that default rates on loans would rise sharply, see chart a. The chart highlights that there was a greater number of respondents expecting defaults to increase in Q2 than in Q1, which in turn was much worse than in Q4 2007. This is the main reason there was a rise in the cost of lending, to companies and households, to compensate for the higher risk of defaults. It was also one of the reasons why there was a further tightening of credit criteria before a loan is made and a cutting back of the supply of loans being made available. How likely are these fears about defaults to be realised?

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