- The credit crunch is sparking a wave of corporate defaults, according to Deutsche Bank.
- Analysts pointed to tighter financial conditions stemming from bank failures and higher interest rates.
Tighter credit conditions are set to usher in a wave of defaults and lead to a recession, as the harsher economic and business environment finally puts an end to the lending boom of the last 20 years, Deutsche Bank analysts said.
In a research note released on Wednesday, analysts pointed to the boom in credit that spanned the past two decades, with financial institutions ramping up lending as markets enjoyed ultra-low interest rates and steady economic growth.
But that era is coming to end with tighter lending standards and higher interest rates. The onslaught of defaults appears to have already started, with US high-yield bond defaults rising to 2.1% from 1.1% last year, and loan defaults rising to 3.1% from 1.4% last year.
At their peak, high-yield bond defaults could rise to 9%. Meanwhile, US loan defaults could rise to 11.3%. That's close to the all-time high of 12% seen during the Great Financial Crisis, though the overall credit bust will likely be less severe than 2008, the bank forecasted.
"Our cycle indicators signal a default wave is imminent. The tightest Fed and ECB policy in 15 years is colliding with high leverage built upon stretched margins," analysts said, calling defaults a "near-term risk" over the next six to 12 months.
Tight credit conditions are also signaling that a recession is set to follow the ending of the credit boom. Deutsche Bank's US credit recession gauge is flashing a 35-40% chance the economy will enter a downturn, the highest reading since the pandemic.
"Today, this model is increasingly telling us to sell," the bank's analysts said.
Wall Street has been bracing for a credit crunch since the collapse of Silicon Valley Bank this year, which set off a chain of lender failures that have caused other banks to pull back. Banks have already started to tighten up lending by the most they have on record, per data from Morgan Stanley, which has in turn made a recession more likely in 2023.
A full-blown recession combined with a credit crunch could result in $1 trillion of corporate debt defaults, Bank of America said.