Corporate Defaults 'Could Hit 10%' as the Credit Crisis Worsens

Nothing has changed. The fundamentals continue to deteriorate in the US financial system and economy. What this headline implies is that ten percent of US businesses could become bankrupt in the next year or so. Think about that.

So why is the dollar strengthening and the stock market rising? For two reasons.

First, as the fog of war descends on the Caucasus, so too the fog of government meddling if not outright intervention has been descending on the financial markets. It would take a leap of faux faith to believe that Georgia launched their assault, timed with the opening of the Olympics, without informing the US which is supplying logistical support and military advisors. Cheney has shown rare personal involvement as well. At the least we are sure that there is more to this than meets the eye.

Secondly, a significant amount of liquidity has been arriving at the NY Fed's custodial accounts, coming from Japan and other foreign central banks, which explains much of the short term financial markets action during the thinly traded late summer months.

Nothing has changed. Things continue to worsen in the real economy. We will look for the markets to reflect the underlying trends again soon enough.


Corporate debt default ‘could hit 10%’
By Nicole Bullock
The Financial Times
August 8 2008 01:28

Defaults on corporate debt are ratcheting up as economic weakness takes it toll on the financial health of companies.

The global default rate is expected to climb to 6.3 per cent over the next 12 months and it could reach 10 per cent should the US sink into a protracted recession, Moody’s Investors Service said on Thursday.

“The storm is gathering for default rates moving up,” said Kenneth Emery, Moody’s director of corporate default research.

Fellow rating agency Standard & Poor’s also warns that credit conditions are deteriorating. “We have long been proponents of the view that the credit euphoria of the prior boom years beginning with 2003 would necessitate a shake-out and purge,” S&P said in a recent report.

“This would result in substantially higher downgrades and defaults, concentrated in the US, but not without repercussions in other parts of the world.”

A year into the credit crunch, defaults have begun to move higher, but they still remain well below the levels reached in other economic downturns. Moody’s default rate hit 10.4 per cent in 2002 and the all-time peak was 11.9 per cent in 1991.

In July, the speculative-grade default rate rose to 2.5 per cent from a revised level of 2.1 per cent in June, marking the largest monthly increase since the default rate bottomed at 0.9 per cent in November 2007, Moody’s said. A year ago, the global speculative-grade default rate stood at 1.5 per cent.

“Certainly, this year the lack of issuers with debt coming due and the prevalence of covenant-lite deals have helped to keep a lid on defaults,” Mr Emery said. “As we move through this year and 2009 that lid will be removed.”

In the past few years of easy lending, issuers refinanced debt and obtained so-called covenant-lite deals, which do not include traditional default triggers that safeguard lenders.

In the US, the consumer transportation companies, primarily airlines, will have the highest defaults, Moody’s expects, while in Europe durable consumer goods companies will be the most troubled.

The Fog of War Descends on the Oil Rich Caucasus

"Give me the money that has been spent in war and I will clothe every man, woman, and child in an attire of which kings and queens will be proud. I will build a schoolhouse in every valley over the whole earth. I will crown every hillside with a place of worship consecrated to peace." Charles Sumner

The spark for the start of the first World War was the assassination of Archduke Ferdinand in Serbia, although the friction amongst the great colonial empires provided the fuel. One of the precursors to the second World War was the Spanish Civil war in which the fascists and the republicans engaged in some preliminary exercises, although it was the German incursion into Poland that unleashed the dogs of war.

In all these instances the large multinational bankers were actively supporting both sides. It is a shocking fact that both British and American banks continued to do business with the Nazis even after the War was well underway. Banking with Hitler - BBC War can be surprisingly good for business, especially if natural resources are on the table, and big money often knows no sides. From an economic point of view, war is just another means of impoverishing the many in order to enrich the few.

The Russians contend that Georgia has provoked this conflict. Georgia is an ally of the United States, and has been seeking NATO membership, although that has been deferred by a Europe not seeking to provoke Russia. It is the largest contributor of troops to Iraq after Britain. Israel is said by Debka.com to be supporting the Georgians with military advisers.

This incursion was interestingly timed with the start of the Olympics. This appears to be a tactical strike designed by someone to change the profile and balance of the oil resources and pipelines in the region. It would be incredible to assume that Georgia had not informed the US of its intentions beforehand, considering we have troops based there, although anything is possible with regard to who fired first. This may be 'blowback' from a Russia that has been increasingly pressured by the US. On the other hand it may be a last provocation from the neo-cons and Bushco. The 'fog of war' is descending rapidly.

Watch this one closely for signs of escalation and spillover, and any impact on the oil markets. We cannot illuminate the good from the bad, the provacateurs from the responders. But we can see trouble, and this on has heavy implications for oil.Sometimes tactical actions can get out of hand and gain momentum.

Timeline of the Georgian - Ossetian - Russian Tensions

"In war the first casualty is the truth." Aeschylus

"When the rich wage war it is the poor who die." Jean-Paul Sartre

"War hath no fury like a noncombatant." Charles Montague

"Every gun that is made, every warship launched, every rocket fired signifies in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. This is not a way of life at all in any true sense. Under the clouds of war, it is humanity hanging on a cross of iron." General Dwight Eisenhower

"Battle not with monsters lest ye become one; for when you look into the Abyss, the Abyss looks into you." Friedrich Nietzsche

"Throughout history, it has been the inaction of those who could have acted; the indifference of those who should have known better; the silence of the voice of justice when it mattered most; that has made it possible for evil to triumph." Haile Selasssie

How fortunate for leaders that men do not think. Adolf Hitler

Your Weekend Read on a New School of Economic Thought

Since its August and she-who-must-be-accommodated is on holiday leaving us to fend for ourselves, we don't mind accomplishing the task of illuminating the flaws in the financial system for this weekend not by our own hand but by recommending an excellent essay from The London Banker.

As we have said many times before, (before you started nodding off, or thinking about the Olympics, or most likely just kicks, bangs, and thrills of the bellybutton and below), a new school of economic thought is scheduled to arise from the ashes of the economic conflagration in which are we are presently engaged, three hundred point up days in stock markets to cheer the mob notwithstanding.

The London Banker sets the scope for this new school of economic thought in his essay.

An appetizer and then the link to the repast. Enjoy.

It should be obvious that the financial sector, as intermediaries between savers and productive ventures requiring capital, should never rise to the point where it alone represents over thirty percent of economic activity. Nonetheless, markets all over the world carelessly followed the path of under-production, dis-savings and over-consumption as the path to prosperity rather than a betrayal of capital into hopelessly unproductive works...

Regulatory policies promoting misallocation of capital included elimination of restrictions on bank dealing and brokerage of securities and derivatives, self-determined models-based capital adequacy calculation, ratings-based weightings of capital assets, accounting reforms that permitted off-balance sheet financings and acceptance of ill-transparent corporate structures....

If the core problem leading to the current seizure of the credit markets is the misallocation of credit into unproductive works during the boom years, then no amount of new credit will solve the problem unless the distortions promoting misallocation are redressed through fiscal and regulatory policy changes. Bailouts and recapitalisation of failed policies of the past are only digging a deeper hole, betraying more capital of younger generations into the unproductive works financed by the current generation.

Snake Oil and Deflation by The London Banker

Crazy Eights - Charts in the Babson Style for Week Ending 8.8.08