Surge in Corporate Bankruptcies, Debt Market Giants Warn "Default Cycle Has Begun"

As the market re-adapts to the Fed's new rules of the game that "higher interest rates will last longer", the impact of interest rate hikes is slowly permeating consumers and businesses, and debt pressure is getting heavier. Recently, at the Bloomberg Global Credit Forum in London, the giants of the debt market unanimously said that they saw the imminent risk of governments due to rising interest rates. Torsten Slok, chief economist at Apollo Global Management (Apollo Global Management), said that the number of companies filing weekly bankruptcy filings in the United States is close to the highest level since 2020, and with the increase in bankruptcy filings, the default cycle has begun * *.! ## Debt giants warn of huge risks James Zelter, co-president of Apollo Global Management, an American private equity giant, says the real impact of rising global borrowing costs has yet to be felt in the U.S. and Western European markets:> I'm skeptical when people say the U.S. economy is headed for a soft landing. What I see is a world where the financial environment has become more tense. Michael Arougheti, co-founder of Ares Management LLC, said he was concerned about the risk of an imminent "fiscal accident" in the United States. Easterly Joshua, co-founder of Sixth Street Partners LLC, and Hamza Lemssouguer, a star trader, both believe defaults will rise in the coming years as riskier debt matures and needs to be refinanced. Bank of America's star analyst Michael Hartnett pointed out in the report that interest rates remain high for a long time may lead to a hard landing of the US economy in 2024 and lead to financial market turmoil. There are already some signs in the current market, * * including a steeper bond yield curve, rising unemployment and personal savings rates, and an increase in defaults and overdue payments * *:> the default rate on high-yield bonds rose from 1.6 per cent to 3.2 per cent, the default rate on credit cards rose from 0.8 per cent to 1.2 per cent, while the default rate on auto loans surged from 5.0 per cent to 7.3 per cent. According to the Global Debt Monitor released by the International Finance Association (IIF), global sovereign debt, corporate debt and household debt increased by $10 trillion billion in the first half of 2023, reaching a record of about $307 trillion. More than 80 per cent of new debt in the first half of the year came from developed markets **, with the largest increases in the US, Japan, the UK and France, the IIF said. * *! ## Higher interest rates mean greater debt service pressure. Data through June show that the cost of servicing US federal debt soared by 25% in the first nine months of the fiscal year, while governments like the UK, which borrowed heavily during the pandemic, now face liquidation at higher interest rates. The United States and the United Kingdom are by no means alone. The IIF expects global debt to reach 337 percent of GDP by the end of 2023, well above pre-pandemic levels, driven in large part by fiscal budget shortfalls. Arougheti believe that the main cause of concern is fiscal, not monetary policy. He noted:> "Globally, the biggest risk right now is clearly deficit spending. We have a greater risk of making a mistake on that front." At the same time, as the Federal Reserve keeps high interest rates for a longer period of time, which has an impact on the profit margin of enterprises and the ability to repay principal and interest, Slok expects that investment grade and high-yield companies will experience higher refinancing costs in the next few quarters, while the increase in the number of bankruptcy filings indicates that the default cycle has begun:> the default rate will continue to rise in the next few quarters, especially the impact on medium-sized enterprises. The number of bankruptcy filings for companies with $10 million in debt is continuing to soar.>> !