Recently, Copenhagen-based Maersk issued a statement stating that global container trade may shrink by as much as 4% this year as there is no substantial sign of recovery within the year, compared with the previously expected decline of 2.5%.
“Our expectation is not a recession, but a very depressed environment that will continue for the rest of the year,” company CEO Vincent Clerc said, expecting some recovery in the market to return to positive growth territory by 2024. We remain concerned about the global economy.
Recently, a wave of corporate defaults and bankruptcies is sweeping the world. According to data from Bloomberg, the scale of global corporate defaults has reached more than 500 billion US dollars. Moody’s predicts that global corporate default rates will continue to soar, and in extreme cases may even exceed the 2008 financial crisis. Analysts worry that this storm of corporate defaults will increase the risk of an economic recession.
Corporate default rates continue to soar
On the surface, large-scale corporate defaults are a common occurrence in global financial markets. However, there is a deeper and more disturbing main thread behind this: over the past few years, long-term low interest rates have made funds extremely cheap, giving rise to debt. surge. As central banks around the world raise interest rates and maintain high interest rates for longer than previously expected, companies will face a reckoning with the debt they have accumulated over a long period of time.
In the United States, the amount of U.S. junk bonds and leveraged loans issued by riskier and less creditworthy companies has doubled since 2008, before the Federal Reserve began this aggressive rate hike cycle, according to S&P Global. More, reaching 3 trillion US dollars in 2021. As global economic growth slows, these upcoming debt maturities increase corporate default risks.
Data shows that distressed bonds and loans have surged by more than 360% since 2021 in the Americas alone. Markets worry that if this scale of defaults continues to spread, it could lead to the first widespread default cycle since the financial crisis.
This is happening. Moody’s data shows that in June this year, the 12-month default rate of global companies reached 3.8%, higher than the historical record level of 2.8% in December 2022. Among them, in the first half of this year alone, 55 US companies have defaulted, accounting for the majority of global defaults (81), which is more than the whole of last year (36). Meanwhile, more U.S. companies filed for bankruptcy protection in the first half of this year than in any comparable period since 2010, according to S&P Global. The number of bankruptcies filed so far this year has nearly doubled from the same period last year to 340.
Increased risk of recession
Analysts worry that this storm of corporate defaults will affect the global economy. Due to the previous banking crisis in the United States and Europe, and the continued rise in interest rates, banks have reduced lending, and there will be a wave of defaults, which will hit the economy. Both factors, reduced lending and a wave of corporate defaults, will also tighten financial conditions and increase the risk of a recession. Bank of America warned earlier this year that tougher credit conditions coupled with a broad economic recession could lead to defaults on nearly $1 trillion in corporate debt. An analysis report by Deutsche Bank showed that the U.S. debt default rate may rise to 11.3%, only slightly lower than the historical high of 12% during the Great Recession.
Of course, there are still many uncertainties. For example, in the face of higher borrowing costs, the U.S. economy has remained surprisingly resilient so far, and the steady slowdown in inflation has also triggered market speculation that the Federal Reserve may be able to achieve a “soft landing” for the economy. The spread between U.S. junk bond yields and Treasuries, one of the key gauges of bond market risk, has also narrowed since March, when the collapse of Silicon Valley Bank briefly sparked investor concerns about a credit crisis, but the crisis has not Yet to happen.
But even a relatively modest rise in defaults poses another challenge for the economy: The more defaults rise, the more likely investors and banks will withdraw loans, leaving more businesses trapped as financing options disappear. Dilemma. The resulting defaults and bankruptcies will put pressure on the labor market, causing workers to lose their jobs, and correspondingly dragging down consumer spending and the economy.
How do textile companies respond to the wave of defaults?
For example, during the transportation of goods, if the other company delays the shipment, the textile company needs to emphasize the delivery time or shipping time with the production management department or supplier of its own factory.
For contracts signed before the default storm strikes, whether force majeure or change of circumstances applies, the failure to perform the contract must be due to force majeure or change of circumstances. If force majeure occurs after the parties delay performance, they cannot be exempted from liability.
Paragraph 2 of Article 117 of the “Contract Law” stipulates: “Force majeure as mentioned in this law refers to objective circumstances that cannot be foreseen, unavoidable and cannot be overcome.” Therefore, invoking force majeure exemption must occur when the parties enter into the contract. Objective circumstances that cannot be foreseen, avoided, or overcome. If there is a subsequent breach of contract such as failure to perform the contract or inappropriate performance, the enterprise will certainly no longer be able to invoke applicable force majeure to excuse itself.
Similarly, according to the provisions of Article 26 of the “Interpretations of the Supreme People’s Court on Several Issues Concerning the Application of the Contract Law of the People’s Republic of China (2)”, the situation changes.Four conditions must be met for the application of the change. The first one is that the fact of change of circumstances was not reasonably foreseeable by both parties when entering into the contract. Not to mention the fact that the change of situation is “a major change that is unforeseeable and not caused by force majeure and is not a commercial risk.” Therefore, based on whether this standard was foreseen when the contract was entered into, the enterprise cannot invoke the applicable change of circumstances principle to change or terminate the contract in this case.
Finally, not all types of contracts signed by an enterprise can be invoked to reduce liability and losses after the performance of all types of contracts is affected by changes in the external environment. It is necessary to determine the specific loss reduction plan based on a comprehensive judgment based on the type of contract, the nature of the rights and obligations of the contract, the performance and status quo, force majeure and exemption clauses, etc.
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