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Corporate Defaults May Climb Above 8% in Europe, S&P Reports

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Europe’s sovereign debt crisis, combined with scarce and expensive debt financing, may drive the region’s corporate default rate above 8.4 percent, according to Standard & Poor’s.

The New York-based ratings firm’s base case is for a 6.1 percent default rate, equivalent to 41 companies failing to meet their commitments in one year, S&P said in a note today. That’s an increase from the 4.8% rate at the end of 2011 and compares with a previous forecast of between 5.5 percent and 7.5 percent, according to S&P.

Growth rates in Europe are slowing as countries seek to implement austerity budgets to repair public finances, threatening to push the region into recession. At the same time, banks seeking to conserve capital are shrinking their loan books, cutting one source of credit for lower-rated companies and making it tougher to refinance loans as they come due.

“Country risks will likely weigh on the credit fortunes of more domestic-oriented European companies,” Paul Watters, head of corporate research at S&P in London, said in the statement. Companies that have “significant exposure to economies that are hardest hit by the sovereign debt crisis” will be the most affected, he said.

The World Bank yesterday said the euro-region economy may contract 0.3 percent, down from an earlier forecast of a 1.8 percent gain. European Central Bank President Mario Draghi on Jan. 17 called the area’s growth prospects “dismal,” saying that the situation is “very grave.”

Defaults are likely to remain “well below” the peaks reached in the third quarter of 2009, when the rate reached 14.7% in Europe, according to S&P.

S&P’s forecast is based on its portfolio of 676 companies with public or private ratings of BB+ or lower and based in the 27 European Union nations plus Iceland, Norway, and Switzerland, according to the statement.

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