If asked to pick one word to describe the global financial
crisis, few would be likely to choose “average.” The Wall St Journal reports that in terms of corporate bond
defaults, that’s precisely what it is, according to Deutsche Bank. Over the
five years from 2007 to 2011, cumulative default rates for “junk”-rated issuers
with double-B, single-B and triple-C-or-lower ratings have been 8.7%, 22.6% and
50.8%, respectively, versus long-term averages of 10.1%, 25% and 51.8%, the
bank says in its annual default study.
Even within investment-grade credit, which has seen
unprecedented collapses such as that of Lehman Brothers, default rates are only
slightly higher than average, at 1.1% for double-A bonds and 2.1% for single-A
bonds, the bank notes. That’s thanks to huge interventions from governments and
monetary policymakers.
Remarkably, that means that even the extremely tight credit
spreads of 2007, fuelled by arguably the biggest credit bubble in history, have
compensated investors for defaults. Take the blue-chip Markit iTraxx Europe
index, where in 2007 it cost just EUR28,000 a year to insure EUR10 million of
debt against default for five years, versus EUR139,000 now. The 2007 price
implied a default rate of 2.3%, assuming a 40% recovery; the actual default
rate was 0.8%......
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