Economic springtime for some after the long freeze

Signs of springtime begin to emerge with Germany expected to register a growth rate of 1.7% in 2010 and the UK technically out of recession.
Analisis Credito y Caución
Madrid - 03-mai-2010

The extremely cold winter certainly hasn’t helped the pace of economic recovery in some European countries, and especially so in the long suffering construction sector. But, as signs of springtime begin to emerge, so does some optimism about the prospects for 2010 – with Germany expected to register a growth rate of 1.7% [the highest growth rate in Western Europe] and the UK technically out of recession.

There are still plenty of April showers around, though, with restricted bank lending causing headaches for Spanish companies, corporate insolvencies in Ireland continuing their upward trend - the construction industry, not surprisingly, the worst affected sector – and Hungary struggling to reduce its debt burden.

`Austerity measures´ is the buzz phrase for 2010. As political pundits debate the possible outcome of the UK’s forthcoming general election, it’s clear that, whichever party wins, it will inherit a huge budget deficit, and the need for further spending cuts, which could, in turn, hamper recovery.

Across the pond there’s some good news, as Mexico basks in the economic sunlight from the upturn in the US economy. It may be a little early for a celebratory hat dance, though, as the government still needs to make major reforms to ensure long-term recovery.

Expected default in Western Europe and USA

One of the most important factors that any business needs to know is the trend in insolvencies in their markets. The Expected Default Frequency [EDF] is based on listed companies in the markets referred to, and the likelihood of default across all sectors within the next year.  In this context, default is defined as a failure to make a scheduled payment, or the initiation of bankruptcy proceedings. Probability of default is calculated from three factors: market value of a company’s assets, its volatility and its current capital structure. As a guide, the probability of one firm in a hundred defaulting on payment is shown as 1%.

In February 2010 the median EDF for some European economies showed some signs of stagnation after the generally improving trend that Crédito y Caución has seen for several months. UK and Netherlands figures barely changed, while France recorded an 8 basis point increase, but its median EDF is still below the December 2009 level. Germany and Belgium registered modest decreases of 4 basis points- in the case of Belgium it has been the first [albeit modest] decrease since September 2009.  Again the US recorded a double-digit decline of 17 basis points, and its median EDF is now below 150 basis points – the lowest figure in 18 months.

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