In recent weeks well-known American firms ranging from Neiman Marcus to J Crew have gone bust. Many more firms are sure to get into trouble
get business failures on a grand scale.” So declared James Bullard, president of the Federal Reserve Bank of St Louis, on May 12th. Peter Orszag, a former official in Barack Obama’s White House and now with Lazard, an investment bank, warned that the American economy could face “a significant risk of cascading bankruptcies”. How bad will things really get for America Inc?
First, to harbingers of doom. One is the upheaval in the market for “speculative grade” bonds. In America, two-thirds of non-financial corporate bonds are rated junk or, the level just above junk. In April, Goldman Sachs, another investment bank, predicted that over $550bn of investment-grade bonds will fall to junk status by October .Stern Business School reckons that about 8% of all firms whose debt is rated speculative grade will default in the next 12 months.
The upshot is that a second, bigger wave of bankruptcies is on the cards. How would that compare to past troubles? At the peak of the financial crisis, the global default rate for junk bonds was 10%. Moody’s, a credit-rating agency, predicts that if the current crisis is more severe than the financial crisis, as now seems likely, the default rate could rise to 20.8% .
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