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In the United States, the Number Of Bankruptcies Is Rapidly Increasing

Published by Tavex Analysts in category Market News on 14.11.2023
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The number of business bankruptcies in the United States showed no signs of slowing in September, with the third-quarter figure being the highest since 2023. According to S&P Global, the number of bankruptcies reached a record high in the first half of the year.

S&P Global Market Intelligence recorded 62 bankruptcies in September, bringing the total for the third quarter to 182.

S&P reports bankruptcies of public companies (publicly traded companies) and private companies with more than $2 million in public debt and assets or liabilities at the time of bankruptcy filing. It also applies to private companies with assets or liabilities in excess of $10 million at the time of bankruptcy filing.

Slowing economic growth, rapidly rising interest rates, and high inflation are the main causes of bankruptcy. All of these factors have exacerbated the situation of highly indebted companies. While low interest rates and government aid helped many businesses a few years ago, these lifelines have now vanished.

The retail (consumer discretionary) sector will experience the highest number of bankruptcies in 2023. The industrial sector comes next, then healthcare, and finally the financial sector.

Firms Are Put Under Pressure As Interest Rates Rise

One of the primary causes of bankruptcies is that the Federal Reserve has raised interest rates to more than 20-year highs and is keeping them there. This has put a lot of businesses under a lot of stress.

Higher interest rates are detrimental to businesses with less stable financial situations. They are finding it more difficult to refinance their loans as interest rates have risen sharply. This causes their financial situation to deteriorate, making it more difficult for them to obtain credit from banks. This can lead to a downward spiral from which the company will find it difficult to recover.

Despite the fact that the Federal Reserve has now stopped raising interest rates, the situation has not improved. Furthermore, the impact of higher interest rates on businesses is frequently delayed, implying that things will not improve anytime soon.

Paul Hickey, co-founder of Bespoke Investment Group, stated in the middle of the year:

Stock markets bottomed out in 2009 during the financial crisis. Even though the markets were improving, we saw another year of bankruptcies. There are still obstacles to overcome.

Economists Warn of Rising Bankruptcies and Tightening Credit Cycles Amid Federal Reserve Rate Hikes

Vanguard’s chief economist, Joe Davis, warned investors that the tighter financial situation will persist, banks will reduce lending, and the number of bankruptcies will rise by the end of the year.

Bank of America, a major US bank, predicted the end of the credit cycle in the spring, predicting an increase in bankruptcies. They warned that a trillion dollars in debt could be flushed down the toilet.

Oleg Melentyev, a strategist at Bank of America, wrote:

We haven’t had a good credit cycle in a long time, like in 1981, 2000, or 2007. Those cycles came to an end as the credit market and credit conditions tightened.

Indeed, the end of the credit cycle has traditionally coincided with a period of rising Federal Reserve interest rates. Interest rates have already been raised 11 times, and the rate hikes are now on hold. In fact, interest rate increases have typically been halted in the run-up to recent recessions.

Historically, if the Federal Reserve doesn’t increase interest rates for two consecutive meetings (about 3–4 months), it usually lowers them. Looking at the largest US bankruptcies (see chart below), Silicon Valley Bank and Signature Bank are the third and fourth largest banks to declare insolvency this spring.

The banking sector remains under pressure as a result of the large amount of government bonds in their asset structure, with prices falling rapidly in recent years.

Key Takeaways

S&P Global’s record numbers highlight the rapid increase in bankruptcies in the United States. This relates to broader economic conditions influenced by similar monetary policies as those seen in other countries. This includes the ones that the Bank of England has put into place.

Businesses in the United States faced higher borrowing costs as the Federal Reserve raised interest rates to more than a two-decade high, mirroring global rate hikes. This trend, combined with high inflation, has severely hampered companies’ ability to refinance their loans, causing their financial situations to deteriorate.

The rise in interest rates, much like the actions of the Bank of England’s Monetary Policy Committee (MPC), aims to curb inflation and stabilise economic growth. However, in the short term, this has led to increased monthly payments for businesses with existing debts, affecting consumer spending and the overall economic environment.

Furthermore, banks have become more cautious in their lending practises, resulting in higher interest rates on loans, including personal loans and mortgages, further straining individuals’ and businesses’ financial capabilities.

The US situation reflects a global trend of economic tightening. Central banks, such as the Bank of England, raise interest rates to control inflation and economic growth. However, this has inadvertently led to higher interest payments, affecting both commercial and personal finances.

While such monetary policies are designed to stabilise the economy in the long run, they have immediate repercussions. For example, increased mortgage payments and the overall cost of borrowing contribute to the financial strain on businesses and individuals.

In the U.S., sectors like retail, healthcare, industrial, and financial have been notably affected, indicating a widespread impact. The pre-pandemic era, characterised by lower interest rates and more robust economic growth, contrasts sharply with the current scenario of tightened monetary policy and slowed economic activity.

The current situation is a reminder of the delicate balance central banks must maintain in their monetary policies, as their decisions can significantly influence the economic landscape over a period of time. Despite the halt in rate hikes by the Federal Reserve, the effects of previous increases continue to reverberate, pushing borrowing costs to their highest level in years and presenting ongoing challenges in the economic recovery post-pandemic.

Gold price (XAU-GBP)
1,831.53 GBP/oz
  
- GBP2.50
Silver price (XAG-GBP)
23.35 GBP/oz
  
+ GBP0.13

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