A brighter outlook

With every passing month, there are more signs of improvement in the overall economic climate. We are seeing further evidence of economic stabilisation in major economies. In France the recession has technically ended, with exports increasing and private demand remaining robust. While in Italy a recovery was not expected before 2010, we are already seeing tentative signs of a rebound. Canadas economy is expected to resume expansion in 2010 with a 2-3% growth rate, helped by domestic demand and rising commodity prices. And Brazil and Chile demonstrate the resilience characteristic of many emerging markets in South America and Asia, who have no doubt learned from the hardships experienced during earlier economic crises.  That said, according to Crédito y Caución opinion,  there is still cause for caution as, in many countries, the 2010 business environment will be hampered by a steep increase in corporate insolvencies this year. And despite the slight decrease in the US jobless rate in November, unemployment in the major Western economies is still expected to rise in the coming months, which could have negative consequences for domestic demand in 2010. In both North America and Europe, Expected Default Frequency (EDF) improved considerably each month up to September, from their peaks in February/March. That said, EDF results for all the markets monitored were still well above their long-term level, indicating elevated default risk among listed companies. The following 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 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%. However, in October 2009, the median EDF of all but one of the major economies showed a slight increase: by just 1-2 percentage points, with only Germany (7 basis points) and the US (23 basis points) recording higher rises. The Belgian EDF actually decreased by 2 basis points. It remains to be seen if this is the beginning of a worsening trend or simply a one-off deviation from the general pattern of decreasing EDF levels witnessed since February.