The outlook for economic activity is that of a modest recovery in developed markets during 2010, although there are visible differences in expectations of performance across regions. Crédito y Caución expect the United States, which was first to succumb to the slump, to out-perform the Eurozone this year. The Company forecast for the US economy to grow 2.7% in 2010 while, at 1.2%, growth projections of Eurozone output are much more modest. There are still considerable differences in performance across European markets. The rate of growth in insolvencies in 2009 has rested on a number of factors, including each countrys specific economic and financial profile, Central Bank and fiscal measures taken to combat the credit crisis, and the extent to which firms have been able to adjust to their new environment. As a result, Crédito y Caución have seen insolvency rates rise by more than 70% in the Netherlands and by rates ranging from 10% to 65% in other countries.
The likely pattern of emerging economic recovery is that of a moderation in insolvency growth throughout 2010. Crédito y Caución expect several advanced economies to see slight improvements in their number of insolvencies, although a few large Eurozone countries are expected to continue witnessing increasing numbers. For the USA, the UK and France the Company forecast a decrease of 5% in 2010, while Germany [10%] and the Netherlands [2%] are expected to continue their deteriorating trends.
Despite the expected improvements, a prolonged period of weak corporate credit conditions is anticipated. Economic recovery will not herald an immediate return to the benign insolvency conditions that prevailed before to the onset of the crisis.
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 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%.
The December 2009 median EDF again showed a generally decreasing trend. The US again recorded a double-digit fall while the major European economies registered either a levelling-off [Germany] or slight decrease of 3-4 basis points compared to the previous month. All monitored countries recorded the lowest EDF figure for the whole of 2009, except Belgium, whose median EDF was consistent for the third consecutive month.
