Defaults to rise as IMF predicts slow recovery

Default rates and credit costs are expected to rise this year, a survey of credit portfolio managers found, as the International Monetary Fund predicted a severe recession and sluggish recovery.

The New York-based International Association of Credit Portfolio Managers said that its members, by a 19% majority, expected credit spreads to widen; in the last survey, in December 2008, a 4.9% majority expected spreads to narrow. Almost all the respondents expected default rates to rise over the next twelve months, with only 3-5% expecting them to remain static or to fall (the figure varied with the industry sector). This is an increase from December, when a 90.7% majority expected default rates to rise.

In its World Economic Outlook, published yesterday, the International Monetary Fund pointed out that recessions triggered by financial crises tended to be longer and more severe, as did recessions which occurred worldwide rather than being limited to a single region. Both types of recession also tended to be followed by slow recoveries. "The implications of these findings for the current situation are sobering," the IMF commented.

Fiscal measures were more likely to be effective than monetary policy changes in stimulating a recovery, the IMF said, though it warned that countries with high levels of public debt would see the least benefit; emerging market countries with high bank liabilities and large fiscal and current account deficits would be most at risk. The fund said that this put the nations of central and eastern Europe, specifically Croatia, Hungary and Estonia among others, at most risk.

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