In the face of raging inflation, the European Central Bank (ECB) was cornered into implementing its fastest monetary tightening cycle in 15 years, with steep interest rates building pressure on the consumer and investor. Now a crisis looms, where defaults could become increasingly prominent as keeping up with steep interest rates proves to be a mountain to climb.  

According to Deutsche Bank, based on its annual default study, a default crisis looms with companies and consumers expected to start a wave of debt defaults. As detailed in their annual default study, Deutsche Bank expects defaults to peak in the fourth quarter of 2024, with default rates forecast to reach 7.3% for European loans and 4.4% for European high-yield bonds.

The ECB’s  Financial Stability Review (FSR) recently noted that real estate is the most distressed market within European high-yield bonds, accounting for nearly half of all European high-yield distressed debt. Home prices are expected to slump due to weakness on the demand side. High-interest rates have compromised home affordability while making it more expensive for households and investors to own. Due to the floating rates in Portugal, Spain and the Baltic countries, these are the most vulnerable to a debt and real estate crisis.

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