Global Economic Collapse: Next crash will hit Europe much harder than financial crisis, warns Moody’s 

 Tom Rees 18 NOVEMBER 2019 • 6:18PM. Telegraph.co.uk

Europe will be struck by an even larger wave of debt defaults in the next downturn compared to the financial crisis after a surge in junk-rated companies, Moody’s has predicted.

The credit ratings agency warned that the proportion of B3-rated companies, those graded as “speculative” quality, has doubled in Europe over just three years. The deterioration means the region will see “a much larger number of downgrades and defaults during the next cyclical downturn compared with the crisis in 2008-09”, Moody’s said.

Egor Nikishin, an analyst at Moody’s, said a “less benign part” of the economic cycle would raise doubts about the companies’ debt loads and their ability to generate cash.

A decade of ultra-low interest rates and investors being forced to hunt for stronger returns has led to skyrocketing debt levels, particularly for companies. 

Global debt is on course to hit $255 trillion by the end of 2019 after already hitting a record high, new research by the Institute of International Finance has revealed. 

The binge has been driven by the US and China, which account for a combined 60pc of the latest increase in global debt. It warned that slowing global growth poses a threat to the mountain of debt that has been accumulated since the financial crisis.

Moody’s said the total share of B2 and B3-rated companies has doubled to 50 (5) pc from 25pc at the height of the financial crisis. The growth has been “rapid” but levels of speculative-graded companies remain lower in Europe than in the US, it added.

The International Monetary Fund warned last month of a $19 trillion corporate debt time bomb that threatened to worsen the next recession. 

It predicted that in eight major economies, including the UK, that debt-at-risk – the amount owed by companies which cannot cover interest payments with profits – would hit levels higher than those seen in the financial crisis.

“Surges in financial risk-taking usually precede economic downturns,” it warned in its Global Financial Stability Report.

Investors have been driven into riskier parts of debt markets by central banks leaving interest rates close to ultra-low levels. 

Regulators have become particularly concerned about the booming leveraged loan market, which funds the most indebted companies and private equity buyouts. Investors in the risky market have ditched basic protections on the loans in their search for stronger returns.