Will the euro crisis hamper recovery?

Since the beginning of 2010 the median expected default have shown a robust improving downward trend, but the default risk levels are still significantly higher than previous years.

Madrid - 28-jun-2010

The World Trade Organisation expects the volume of world trade to rebound 9.5% this year, after its 12% dip in 2009, driven by surging emerging markets demand, and several economies have profited from this trend.

For instance, while the private consumption that sustained the French economy throughout 2009 has now levelled off, this is offset by its buoyant exports, with heightened demand from Asia and the US. Rising commodity exports to Asian emerging markets have also spurred Canadas economic resurgence, and increasing demand for commodities in particular oil will play a major role in Norways recovery, while New Zealand has increased its food exports to China and India.

But current concerns over the euro threaten to cast a shadow over these and other positive signs. The rise in Italys GDP is countered by its increasing public debt [the government has recently announced a plan to cut 24 billion Euros from its 2011-2012 budgets, a move aimed at shoring up investor confidence]. Even the Bank of Canada has felt the need to caution investors about continuing uncertainty caused by the euro zones problems.  And while Slovakia has so far escaped injury from the euro crisis, this may change if Europes monetary problems spread to the real economy of those EU members on whom Slovakias exporters are so reliant.

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 following Expected Default Frequency [EDF] chart 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 companys 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%.

Since the beginning of 2010 the median EDF of all economies surveyed have shown a robust improving downward trend. Between January and April 2010, the median EDF for Belgium fell 12 basis points, Frances 15 basis points, Germanys 22 basis points and The Netherlands 9 basis points and the United Kingdoms 25 basis points. The US recorded the largest decrease by far with 56 basis points but one has to bear in mind that the US also suffered the largest increase at the height of the credit crisis.

Despite these improvements, most companies in the countries observed are still considered to have significantly higher default risk compared to the previous years.

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