The Economy

Brexit Fears Sour Outlook for European Debt

More than half of credit managers are also expecting increased defaults in North America and Asia, an IACPM survey finds.
Matthew HellerJuly 13, 2016

More than two-thirds of credit managers expect defaults to rise in Europe after the U.K.’s “Brexit” vote but sentiment about global credit conditions improved slightly from a record low in March, according to a new survey.

In its latest Credit Outlook Survey, the International Association of Credit Portfolio Managers found that its members are forecasting more difficult credit conditions over the next year not only in Europe, but also in North America and Asia, even though they do not see a direct link between Brexit and other regions.

Sixty-eight percent of respondents predict an increase in European corporate defaults; 59% in North America; and 60% in Asia.

“Survey respondents do not believe Brexit will have a direct impact on North America or elsewhere outside of Europe,” Som-lok Leung, executive director of the IACPM, said in a news release. “However, the current economic cycle is historically long in the tooth and the negative factors that have been in place for some time, such as slowing growth in China and continuing troubles in the energy patch, are still in place.”

Despite those predictions, the association’s credit default outlook index, in which a negative number indicates an expectation of more defaults over the next 12 months, improved in June to minus 52.8 after hitting an all-time low of minus 56.2 in March.

The IACPM said that while credit managers are paying close attention to the ramifications of Brexit, they are also focusing on the monetary policies of central banks. The U.S. Federal Reserve has delayed another interest rate hike, partly due to Brexit concerns.

“In some ways, ultra-low interest rates are as troublesome as Brexit,” Leung said. “They put tremendous pressure on a range of credit market participants, including investors, such as pension funds, looking for acceptable returns and other market participants with long term and/or leveraged debt exposures.”

Reflecting the uncertainty, survey respondents expect credit spreads to widen over the short term.

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