Credit Market Analysis By Lloyds TSB

The global speculative grade default rate has risen to 4% at end-2008, up from an extraordinarily low level of 0.9% a year earlier, according to Moody’s.

The outlook for corporate default rates and credit spreads

Global default rates are set to rise further this year, but how much?

• The global speculative grade default rate has risen to 4% at end-2008, up from an extraordinarily low level of 0.9% a year earlier, according to Moody’s. This is still only slightly above the long-term average of around 3.2%. In the coming year, Moody’s predicts that the default rate will rise to 15.1% by end-2009, as chart a shows.

• Our own model, based on global economic growth projections, predicts the global default rate will rise to 11.6% this year, before falling back thereafter, as the global economy recovers in 2010 (see chart a again). The baseline forecast is for global economic growth (on a PPP basis) to slow to only 0.1% in 2009, with the US economy projected to contract 2%, see chart b. Growth is expected to recover in 2010, led by the US and emerging market economies.

• The risk to our projection for the corporate default rate is skewed to the upside, towards Moody’s forecasts if the world economic downturn becomes deeper and more protracted than currently anticipated (the dotted line in chart a shows the forecast based on global growth falling 2% this year).

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