naked capitalism

In an amusing bit of irony, Standard & Poors chief, in an interview, acknowledged that the bond markets are anticipating that corporate defaults will run at twice the rate foreseen by the rating agencies.

Recall that roughly half the big business debt outstanding is junk, and nearly all of that was issued in connection with LBOs.

The credit markets for some time have operated on the assumption that the financial system is under severe stress (which is confirmed almost daily in the press) and recession, likely a deep one, is in the offing.

Even if that view seems a bit dour, would you side with the rating agencies given their track record?

From Bloomberg:

Investors are pricing in defaults on corporate bonds twice as high as projected by rating companies, said Deven Sharma, Standard & Poor’s president.

The rating assessor said on March 31 the default rate for non-investment grade U.S. corporate bonds may rise to as much as 5.7 percent and at least 3.4 percent by February next year, as companies are hurt by rising funding costs and a slowing economy. The rate was 1.09 percent in January.

“The markets are pricing in a default rate of nine or 10 percent for high-yield corporate debt, which is a lot higher than we’re forecasting,” Sharma said in an interview with Bloomberg TV. “There is a recession and the recovery will be somewhat slower than we anticipated.”

The number of companies at risk of having their credit ratings downgraded rose by three to a record 703 in March amid a slowdown in housing and consumer spending that has pushed the economy closer to recession, S&P said on April 1. The number of potential downgrades is 90 more than reported a year ago and 68 more than the 2007 average.

Almost 76 percent of negative ratings changes have been among high-yield, high-risk companies, the rating assessor said…

“There is a fundamental change of behavior by consumers,” he said. “For many years, going back to the Great Depression, consumers always first paid their mortgage and if they default, they would default on their credit cards. For the first time, in 2005, we started to see the line being crossed, where consumers are willing to walk away from their mortgages.”

New home foreclosures in the U.S. rose to a record high in the fourth quarter as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said in a March 6 report. Late payments, or delinquencies, were the highest in 23 years, the bankers’ group said.

Um, doesn’t it occur to her that the change in consumer behavior might have been triggered by the new bankruptcy law? If you are above median income in your state (meaning ineligible for Chapter 7), it is easier to walk from your mortgage than your credit card debt. Another example of unintended consequences…