Lucent Technologies, Xerox, Marconi, Swissair, Railtrack, Sabena, Enron - the list of once highly creditworthy companies suffering sudden and precipitous declines in credit quality grows longer almost by the day and no-one knows how many more angels will fall nor how many more junk-rated companies will disappear before the global economy recovers. Moody's Investors Service calculates that in the first three quarters of 2001, 185 rated and unrated corporate bond issuers defaulted on $76 billion-worth of bonds, compared with $49 billion-worth for the whole of 2000. The credit-rating agency's models forecast that defaults will rise to a peak in the first quarter of 2002.
Bond investors have to mark their positions to market and take their licks now, but the effect on banks, which can hold loans even of severely damaged companies at par until they are finally written down, is much harder to discern. But it's not going to be good. Indeed it's precisely such sudden bursts of failures on substantial loans by large and once highly rated companies that can crush banks. So a lot of chief executives and chairmen, a lot of regulators - and a lot of investors in banks' shares and bonds - are now suddenly eager to know what kind of job has been done by those they've put in charge of managing their banks' portfolios of loan and other credit exposures.