measures of corporate distress, which track borrowing costs for junk-rated companies, rose last month amid growing concerns over sovereign debt. While levels are much reduced from a year ago, Moody’s speculative-grade corporate distress index rose to 14.9 per cent at the end of May, up from 14.1 per cent in April in the first rise since February.
Rating agency Standard & Poor’s is finding a similar trend. Its distress ratio, which tracks the number of high-yield securities trading at spreads greater than 1,000 basis points relative to US Treasuries, rose 40 per cent from March to May 14.
A rising distress ratio typically proves to be a precursor to more defaults if accompanied by a market disruption, S&P said.
The article further quotes S&P:
In the slim chance that the economy experiences a double-dip recession, many of the surviving leveraged issuers originated during 2003-2007 could face renewed default risk unless they significantly reduce their debt burdens.
It is not a matter of if, but rather when. We have entered into what i believe is the second leg of the crisis that began in the spring of 2007. Unless drastic changes in the meddling fiscal and monetary policy occur, the Dow Jones and S&P 500 will fall significantly below the March 2009 lows.