- Corporate Default Rate Jumps Past Lehman Moment
by Wolf Richter, http://wolfstreet.com/
And then there’s S&P’s “pessimistic scenario.”
The US corporate default rate, according to Standard & Poor’s Global Fixed Income Research, soared from 2.8% in January to 3.3% in February, a big jump for just one month, and the highest rate since December 2010, when it was recovering from the Financial Crisis, with QE and ZIRP running at full bore, and with banks and big corporations getting bailed out by the Fed and the Treasury.
And it’s higher than it had been during the early phase of the Financial Crisis in September 2008, when Lehman Brothers filed for bankruptcy, when all heck was breaking lose, when stocks and bonds were plunging, and when the default rate was “only” 2.96%.
But this time it’s different, they reassure us. In December 2007, the default rate was 1.02%. At the time, banks were already cracking at the seams. Bear Stearns would soon pop. The Financial Crisis was visible on the horizon. And the economy entered what would later be called the Great Recession. By November 2009, nearly two years later, the default rate peaked at 12%.
These aren’t overnight fireworks. This isn’t binary options trading. Credits take their time to react. But then newly created money surged through the system. What followed was the greatest credit bubble in US history. By July 2014, the default rate had dropped to 1.4%. That was the peak of the Fed’s fanciful handiwork that had “saved” the economy, an era when even the riskiest borrowers could get new money to fill their financial sinkholes, when bankruptcies had become rare, when the business cycle had been abolished, and before the price of oil fell off the cliff.
Then it all came unglued again. And in February, S&P’s US trailing-12-month speculative-grade corporate default rate finally accomplished the feat and jumped above the rate of the Lehman-moment: