Expected Default Frequency trend stops

In May 2010 the months-long downward trend recorded for the median Expected Default Frecuency - the monthly indicator of Atradius Group to analyze and compare the evolution of default risk in different markets- of all economies surveyed stopped for the time being. On the contrary, since more than a year all countries surveyed simultaneously recorded increases. This is the consequence of higher financial market volatility, triggered by growing insecurity over the future economic performance: financial institutions´ health, the pace of the US recovery, the troubles of someeurozone countries [mainly Southern] with sovereign debt and budget deficits, and last but not least the fear of Chinas booming economy suffering a hard landing.   

One of the most important factors that any business needs to know is the trend in insolvencies in their markets. The Expected Default Frequency 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 in the graphic as 1%.

Some markets

At Germanys recovery is tempered by uncertainty. While the weaker euro helps its exports to the US and China, austerity measures in neighbouring EU countries will have the opposite effect. The weaker euro may help Irish exports too, with its sizeable trade with the UK and US.

The UKs new coalition government has wasted no time in taking determined action to reduce the countrys debt, but must tread a fine line to avoid upsetting the still fragile upturn. Australia, too, has seen a change at the top, as prime minister has been forced to stand down over his very public confrontation with the mining industry. Having calmed that issue, new prime minister now has to ensure that the countrys recovery isnt derailed by rising inflation.