Concerns increase about defaults and bankruptcies in the US

Rising interest rates and bond yields following the fight against inflation in the US make borrowing more expensive for the government, businesses and households, while increasing the risk of default and bankruptcy for companies. companies.

As major central banks continue to battle high inflation, the monetary tightening cycle continues.

According to data from the International Monetary Fund (IMF) released in October, authorities have raised interest rates by an average of 400 basis points in developed economies and approximately 650 basis points in developing economies since the end of 2021 in the face of high inflation. .

In the United States, which has the largest economy in the world, the Central Bank (Fed) increased the policy rate to the range of 5.25-5.50 percent, the highest level in 22 years, while the Bank European Central Bank (ECB) increased the refinancing rate. The interest rate at 4.50 percent, the deposit rate at 4 percent and the marginal rate increased the financing rate to 4.75 percent.

Despite central banks’ aggressive tightening of monetary policy, inflation remains unusually high in many economies, especially in the United States and Europe.

Analysts say central banks may need to keep interest rates high for longer as inflation remains high.

IMPACT OF INCREASE IN BOND RATES

Supporting selling pressure in bond markets is expectations that major central banks will keep policy rates high for a long time due to persistent inflation concerns.

While bond prices and bond interest move in opposite directions, bond prices decrease and bond interest rates increase as bond sales increase the supply of bonds.

Especially in the US, the fact that inflation is well above the 2 percent target and macroeconomic data showing that economic activity has not slowed to the desired level stand out as one of the main reasons for the selling pressure in bond markets.

The interest rate on 10-year US bonds, which surpassed 5 percent last month and hit a 16-year high, remains high despite the recent easing. Currently, the interest rate on the 10-year US bond is at 4.50 percent and the interest rate on the 30-year bond is at 4.63 percent.

Federal Reserve officials note that rising long-term bond interest rates have contributed to the tightening of financial conditions since the summer months.

Analysts note that rising bond interest rates also increase government and corporate financing costs in the US and may negatively impact corporate profitability.

According to Bloomberg analysis, annual interest payments on public debt of more than $33 trillion in the United States surpassed $1 trillion by the end of October 2023.

The U.S. government’s estimated interest expense is calculated using Treasury data indicating the government’s monthly outstanding debt and the average interest it pays.

U.S. government interest payments rose to $879.3 billion in the fiscal year that ended Sept. 30, from $717.6 billion a year earlier. This constituted approximately 14 percent of total government spending.

Rising yields on long-term U.S. Treasury bonds, such as 10-year bonds, in recent months indicate the government will continue to face a rising interest bill. Before the year ended, the federal government’s budget deficit increased 23 percent from last year to $1.7 trillion in fiscal year 2023.

Although the upward trend in bond interest rates significantly affects investors’ decision-making processes, it increases the perception of risk in the markets.

GETTING IN DEBT HAS BECOME MORE COSTLY

Tightening monetary policy makes borrowing more expensive, and high interest rates increase vulnerabilities and default risks for borrowers.

Companies that have been accustomed to cheap debt with low interest rates for more than a decade are struggling to cover interest expenses and pay off their debts as borrowing becomes more expensive.

The IMF’s Global Financial Stability Report shows that the proportion of small and medium-sized enterprises struggling to cover interest expenses is increasing in both developed and emerging market economies.

It is also claimed that defaults are increasing in the leveraged loan market, where financially weaker companies borrow money.

These problems are expected to worsen as more than $5.5 trillion in corporate debt comes due next year, according to the IMF.

DEFAULT RATE INCREASED TO 5 PERCENT

High interest rates not only increase borrowing costs, but also reduce consumers’ purchasing power.

While this situation puts pressure on company profits, there are concerns that it could trigger a wave of defaults, leading to more companies going bankrupt and losing jobs.

According to the latest report from international credit rating agency Moody’s, the global default rate is at its highest level since 2021, at 4.5 percent in September. It is striking that the rate in question is above the historical average of 4.1 percent.

The credit rating agency’s report states that the default rate has increased amid slowing economic growth, aggressive interest rate hikes and high inflation.

In the US, it is seen that the loan delinquency rate increased from 4.9 percent in August to 5 percent at the end of September.

THE INCREASE IN NON-COMPLIANCE IS EXPECTED TO CONTINUE

Although the rising default trend seen this year is expected to continue next year, Moody’s predicts the U.S. default rate will rise to 5.4 percent in January.

Analysts say factors such as the expectation that interest rates will remain high for longer, reduced access to credit, a worsening economic environment due to “stubborn” inflation and increasing pressure on economic growth, and the Lack of support from the government or central bank will cause defaults to increase.

INCREASE IN BANKRUPTCY FILINGS

While the high interest rate environment is negatively impacting both businesses and consumers, bankruptcy filings are also increasing.

According to data from S&P Market Intelligence, the number of companies filing for bankruptcy increased from 157 in the second quarter of this year to 182 in the third quarter.

At the end of September this year, a total of 516 companies declared bankruptcy.

A total of 372 companies filed for bankruptcy in the United States last year, 406 in 2021 and 639 in 2020, when the Covid-19 epidemic began.

Analysts interpret the rise in default rates and bankruptcy filings as “a sign that high interest rates are starting to hurt” around the world. (AA)