Credit crunch tests balance sheets

The deflationary trend is now well established. The latest U.S. inflation data showed CPI and core CPI indices falling to 4.9 percent and 5.5 percent respectively, values that are similar to those recorded last month, but down sharply from last summer's peaks of 8.9 percent and 6.6 percent. This trend could bring overall year-on-year inflation to 3.5 percent by June.

As inflation has returned, the market's attention has shifted to the tightening of corporate credit access conditions, the so-called credit crunch. Indeed, the high level of rates has had a threefold effect on corporate credit.

First, it reduced the demand for credit, with a negative contraction recorded only in 2008 and 2001.

Secondly, it has increased banks' restrictions on lending, conditions that reached highs recorded in 2001, 2008 and 2020.

Finally, rising rates have increased the number of bank failures. Since the beginning of the year, 3 U.S. banks have failed, a number, however, that is lower than the historical average. The failures have involved nearly 0 billion in assets, which on an absolute level is higher than 2008, but when related to GDP is lower than 2008.

The main consequence of these failures has been to further worsen credit access conditions.

However, worsening credit conditions are counterbalanced by corporate balance sheets:

1. The leverage ratio of high-risk (HY) companies is at its lowest since 2005
2. The degree of coverage of interest paid is on the highest since 2001

In conclusion, the trajectory of inflation continues to be downward, but the key variable remains the tightening of credit. Corporate balance sheet conditions allow companies to have an important cushion of liquidity to deal with this period, but if this tightening should continue it could lead to an economic slowdown.