SVB Fallout Macro Impact | Unrealized Bank Losses | Fed’s Plan For US Banks | China’s Rebalancing and Openness | EM Monthly | Corporate Defaults

At the end of a busy week, welcome to a packed edition of Essential Economics! The fallout from the collapse of Silicon Valley Bank (SVB) dominated the news and we kick off with our assessment of the macro implications: no material changes to our baseline, but rising downside risks. From our credit analysts, Osman Sattar and team look at the risk for banks of unrealized losses in their securities portfolio while Brendan Browne and team break down the Federal Reserve's new emergency lending facility for U.S. banks. We bring all of our related coverage together on a new landing page.

Turning elsewhere in the macro-credit space, Asia-Pacific Chief Economist Louis Kuijs is cautiously optimistic that China’s rebalancing will continue following its recent reopening. Our Emerging Markets team led by Satyam Panday (economics) and Jose Perez-Gorozpe (credit research) sees tighter financial conditions, but rising manufacturing PMIs. Finally, credit researcher Nicole Serino reports that corporate defaults so far this year have reached their highest year-to-date total since 2009.

Macro Impact From The SVB Fallout Looks Limited

We have spent a busy week focused on the financial markets following the collapse of Silicon Valley Bank (SVB). It's too soon to assess the full impact of the fallout, but for now we think the macro effects will be limited. The U.S. government moved quickly to stem the damage from SVB's collapse and markets remain in flux but have generally calmed.

The main risk: Uncertainty about the way current events might play out and their duration could dampen spending and demand, leading to a steeper-than-expected slowdown.

To read the full article, click here.

Unrealized Losses: The Rate-Rise Risk Facing Banks

Osman and team argue that banks have largely seen increased profitability from the global rise in interest rates, but for some, higher rates have caused a decline in the value of fair-valued financial assets they hold on their balance sheets. This stress can contribute to deterioration in a bank's credit profile, as demonstrated recently in the case of Silicon Valley Bank.

We see the risk of significant unrealized losses materializing to be broadly contained for banks we rate.

To read the report, click here.

Fed’s Plan Should Reduce Contagion Risk

Brendan and team argue that the Federal Reserve's new emergency lending facility for U.S. banks should help address bank liquidity pressure and reduce the odds that unmanageable deposit outflows spread widely. The measures also leave the banks better equipped to handle liquidity outflows should they occur.

Despite the new Fed facility, the heightened confidence sensitivity in recent days may have led to an erosion in franchise value of some banks.

To read the report, click here.

NEW: Global Banking Risk Monitor

After the collapse of Silicon Valley Bank and volatility spreading to U.S. regional lenders and banks across geographies, we continue to assess the macro ramifications and monitor contagion risk in the broader financial system and markets.

To access the monitor, click here.

China’s Rebalancing and Reopening: Cautious Optimism

Louis argues that China's reopening should reveal whether recent structural setbacks were COVID-related or more enduring. A boost in "normal" import volumes this year could be the start of a long cycle and allay concerns that China is turning inwards. We also expect consumption and services to lead this year's economic recovery.

Whether China’s rebalancing will stay on track for the medium term is less certain.

To read the full article, click here.

EM Monthly: Diverging Trends Under Way

Our emerging markets (EM) team led by Satyam and Jose shows that financing conditions have tightened for EMs as spreads have broadly widened. At the same time, leading indicators are pointing to some optimism with the EM headline Purchasing Managers Index for manufacturing exceeding 50 for the first time since mid-2022.

Supply-chain pressures continued to ease, and some indicators are now back to pre-pandemic levels.

To read the full chart pack, click here.

We also published our real-time EM monitor this week. To access that article, click here.

Corporate Defaults: Highest YTD Since 2009

Nicole reports that this year's global corporate default tally rose to the highest year-to-date tally since 2009, as of February There were 15 defaults in February alone, marking the highest monthly total since November 2020. Nearly three-quarters of these defaults came from U.S.-based issuers; U.S. corporate defaults this year are already over 2.5x higher than the year-to-date 2022 total.

We forecast that U.S. and European trailing 12-month speculative-grade corporate default rates could rise to 4% and 3.25%, respectively, by December 2023.

To read the full article, click here.