Global economy under threat of debt default waves: Deutsche Bank
An annual study by Deutsche Bank shows that US loan default indicators have neared an all-time high prompting "boom and bust" preriods.
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A logo of Deutsche Bank displayed on a phone screen in front of a declining stock graph, March 12, 2023 (Reuters)
Deutsche Bank has issued a warning that a cycle of economic expansion and contraction will occur this year, leading to an imminent wave of defaults in corporate debt, particularly in the US and Europe.
According to the Bank's recently published annual study, company defaults will become more frequent compared to the past two decades.
Deutsche Bank anticipates that default rates will reach their highest point in the fourth quarter of 2024. The bank's projections indicate peak default rates of 9% for high-yield debt in the US, 11.3% for US loans, 4.4% for high-yield bonds in Europe, and 7.3% for European loans.
The estimated peak default rate for US loans is nearly at an all-time high, surpassing the peak of 12% during the global financial crisis of 2007-2008 and 7.7% during the dot-com bubble in the late 1990s, as revealed by the study.
Deutsche Bank economists stated, "Our cycle indicators signal a default wave is imminent. The tightest Fed and ECB policy in 15 years is colliding with high leverage built upon stretched margins. And tactically, our US credit cycle gauge is producing its highest non-pandemic warning signal to investors, since before the GFC [Global Financial Crisis]."
Experts stressed that the scale and duration of the economic cycle could come as a surprise, however, they clarified that their forecasts only anticipate a return of the boom and bust cycle and not a shock on the scale of the Global Financial Crisis.
Deutsche Bank also cautioned that aggressive interest rate hikes by central banks, including the US Federal Reserve and the European Central Bank, in response to rising inflation, have increased the risk of a global recession. Germany, the largest economy in the EU, has already entered a recession.
"We suspect the next recession will be the first since the US tech bubble to inflict more pain on credit markets than the real economy," the study said. "Corporate leverage is elevated. And global credit markets derive more of their revenue from manufacturing and the sale of physical goods than the real economy at large," the report concluded.
