Deutsche Bank has issued a stark warning that defaults from corporates and financials could soar over the next five years, if monetary authorities withdraw their support from the financial system and sovereign defaults become a reality in Europe.
Deutsche Bank has warned in its default study that continued intervention from authorities is vital to maintaining an orderly default rate among corporates and financials.
“If implied Western European sovereign defaults come vaguely close to being realised then the next five years of corporate/financial defaults could easily be worse than the last five relatively calm years. Much may eventually depend on how much money printing can be tolerated as we very close to being ‘maxed out’ fiscally”, said the report.
The warning comes despite corporate and financial default remaining relatively stable during the financial crisis from 2007 to 2011. Deutsche attributed this to repeated interventions from authorities to stop some of the world’s largest companies, including major banks, from defaulting and going bust.
The report suggests that defaults during the past five years were no higher than historical averages, based on data from ratings agency Moody's. Indeed, cumulative default rates for Ba, B and Caa-C rated issuers were 8.7 per cent, 22.6 per cent and 50.8 per cent during the financial crisis, lower than long-term averages of 10.1 per cent, 25 per cent and 51.8 per cent, respectively. But still, the Deutsche report urged investors to avoid complacency.
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