Investors in Europe’s €400+ billion junk bond market are forcing high-risk corporate borrowers to pay massive premiums for loans amid fears of a tidal wave of defaults.
According to Intercontinental Exchange Bank of America index data cited by business media, euro-denominated junk bond yields are at a seven-year high amid fears that a further slowing of economic activity, combined with sky-high central bank interest rates put in place to fight inflation, could make many borrowers unable to meet their obligations.
The average gap between high-risk corporate debt and bonds offered by governments has widened to an average of more than 18 percentage points, nearly triple the rate they were at the start of 2022, before the Ukraine crisis escalated into a full-blown NATO proxy war with Russia, when the spread stood at as little as 6.7 percent.
Germany – the euro area’s benchmark trendsetter – increased its 10-year bond yield to 2.98 percent, its highest level since 2011, in early October, meaning European corporate borrowers with a credit rating of CCC or below must be ready to pay creditors dividends approaching 21 percent for the privilege of borrowing.
The European junk bond market has shown far greater volatility than that of its US cousins across the Atlantic, with the spread on American junk bond corporate borrowing dropping from 12 percent in early 2023 to below 10 percent now, despite a statistically greater number of bankruptcies in the US. Economists attribute the gap between the two markets to the fact that Europe’s financial system is far more “bank-based” than the US’ “market-based financial system,” meaning borrowers have fewer lenders to turn to.
European GDP growth estimates for 2023 dropped below one percent last month, weighed down by the continued gloomy outlook for recession-mired Germany, which is expected to shave 0.4 percent off its GDP for the year amid high energy costs, slumping consumer demand and industrial output, and high inflation.
Europe’s economies are facing the threat of deindustrialization amid the crisis brought on by the rejection of Russian energy, with the US moving to poach European producers by offering generous subsidies for the production of so-called "green" technology-related products, including electric vehicles on US soil.
Russian President Vladimir Putin warned Germany and other European powers of the economic consequences they would face by cutting themselves off from cheap and dependable Russian energy supplies back in the spring of 2022, accurately predicting that “together with Russian energy resources, economic activity will also be leaving Europe for other regions of the world” amid the loss of global competitiveness.
“One gets the impression that our Western colleagues, politicians and economists have simply forgotten the foundations of the elementary laws of economics, or, to their detriment, prefer to deliberately ignore them,” Putin said at the time, adding that European leaders seemed ready to sell out their own countries due to pressure from across the ocean.