Global economic storm brewing: High interest rates trigger wave of corporate defaults and bankruptcies

Due to the impact of high interest rates, the world is facing a wave of corporate defaults and bankruptcies. This is not just a problem in the U.S.; global debt default rates are also rising, putting immense pressure on the global economy.foreign tradeOctober 21, 2024 12:22

In the latest data from S&P Global, shocking figures stand out: by the end of August, 459 companies had filed for bankruptcy. Incredibly, this number has already surpassed the total bankruptcy filings of the previous two years combined. And this is not just an American problem—global debt default rates are also continuing to rise.

Behind this phenomenon lies the central banks continued measures to combat inflation, with the impact of global interest rate hikes beginning to show. August data directly revealed the severity of the issue: there were 107 corporate debt defaults globally, the highest monthly total since 2009.

Collin Martin, fixed income strategist at Charles Schwab, pointed out that many companies borrowing costs in 2023 have doubled or even nearly tripled compared to previous years. This is undoubtedly a heavy blow to corporate balance sheets.

Current data shows that the effective yield on below-investment-grade corporate bonds has surged to 9%. This is direct evidence of rapidly rising corporate costs. Meanwhile, the 10-year U.S. Treasury yield has again hit a new high, exceeding 4.8%.

Martin further explained that due to high interest rates, when companies attempt to issue or refinance debt, they must do so at yields far higher than in the past. This means they must pay more interest. Against a backdrop of slowing corporate revenue, this severely impacts profitability.

For some zombie companies, this environment is particularly harsh. These companies survived in the ultra-low interest rate environment but now face significant challenges in the current economic climate.

Facing these challenges, Fitch Ratings issued a concerning forecast: by the end of 2023, the default rate for high-yield bonds may reach 4.5%-5%, more than six times the 2021 default rate.

More worryingly, Martin predicts that by 2024, the total number of bankruptcies and debt defaults in the US may surge sharply. This situation could lead the US economy into recession. Companies going bankrupt or burdened with heavy debt may conduct massive layoffs during economic recovery, which would be a major blow to the entire economic system.

Overall, the current economic conditions present a severe test globally. Consumers pandemic savings are dwindling, the resumption of student loan payments and soaring bond yields will further increase economic pressure. Market experts note the yield curve inversion has persisted, typically signaling an impending recession.