Fitch Warns Of Surge In Corporate Defaults For 2024 Despite Fed's Pause On Interest Rate Hikes

Fitch Ratings forecasts a rise in corporate defaults in the U.S. and eurozone due to stricter central bank policies.

What Happened: Fitch Ratings stated on Wednesday that tougher central bank regulations will continue to impact the economy, leading to an increase in corporate defaults in 2024, as was reported by Business Insider. The rating agency anticipates a slower pivot from the Federal Reserve than what U.S. markets are predicting, with interest rates likely to decrease by 75 basis points throughout the year.

High borrowing costs are anticipated to weigh on corporations through 2024 despite global optimism for a shift from central banks. The overall 12-month defaults among U.S. bond and loan issuers since the end of 2022 have jumped from 1.6% to 3.04% for leveraged loans and 1.35% to 2.99% for high-yield bonds. By 2024, Fitch predicts defaults could rise to a rate of 3.5%-4.0% for leveraged loans, and high-yield bond defaults may hit 5.0%-5.5%.

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“Zombie firms” like WeWork, which filed for bankruptcy this year, are especially at risk due to a lack of sufficient cash reserves to meet borrowing requirements. Despite higher default rate predictions, Fitch does not foresee a U.S. recession in 2024.

Why It Matters: The Federal Reserve held the federal funds rate target range at 5.25%-5.5% in a move anticipated widely, marking the third consecutive meeting where rates have remained steady, likely signaling the end of the rate-hiking cycle that started in March 2022.

Despite the Fed’s optimistic stance, discussions about an economic downturn have surfaced following the aggressive interest rate hikes during the ongoing tightening phase. Data compiled by Visual Capitalist from official sources revealed that top corporate leaders are considerably more convinced of an impending recession, with an 84% prediction, even as Federal Reserve staff members assign a negligible probability to it.

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