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%.
After an increase in May across all the economies surveyed, due to higher financial market volatility triggered by uncertainty over the global economic recovery and the eurozones troubles, the situation has calmed down again. The July 2010 median EDFs for France, Germany and the Netherlands are the lowest since the beginning of 2010. At the same time Belgium and the UK recorded slight decreases, while the US median EDF dropped 16 basis points.
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