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Moody's Sees Global Default Wave Ahead

The global default rate could rise sharply in 2008, to 4.2 percent by the end of the year, as the credit turmoil constrains access to funding and the economy slows, Moody's Investors Service warned on Thursday.

Moody's has raised its forecast from 3.6 percent a month ago. If there is a U.S. recession, then default rates could rise to "near double-digit levels," the ratings agency said in a statement, although it said its forecasts were based on a slowing economy, not a recession.

In November, the global "junk" bond default rate was 1.0 percent, the lowest level for 26 years, Moody's said, and down from 1.9 percent a year ago.

"Currently low default rates reflect the easy credit conditions of the past couple of years which allowed most issuers to refinance on favorable terms, and strong economic growth which has allowed issuers to make their debt service payments," said Kenneth Emery, Moody's director of corporate default research.

So far this year, 17 issuers rated by Moody's have defaulted, versus 29 in the same period of 2006.

In Europe, the annualized default rate fell to 1.2 percent at the end of November, down from 2 percent at the end of October, Moody's said.

Analysts broadly expect a pick-up in defaults next year, but predictions range widely.

Chris Jones, chief investment officer at London-based fund of hedge funds Key Asset Management, told Reuters on Wednesday he expected default rates in 2008 to return to 2002 levels.

According to Moody's the global default rate hit 8.2 percent in 2002, as 133 speculative-grade rated borrowers defaulted on $143.2 billion of bond and loan debt. In the past 10 years, the default rate was only higher in 2001, when it hit 10.6 percent.

Default rates in the U.S. are expected to reach 4.7 percent in a year's time, and 3 percent in Europe, Moody's said.

"Thanks to limited refinancing needs due to plentiful corporate lending in the past and more issuer-friendly structures, companies should generally have enough room for maneuver to absorb the near-term challenges," said Andrea Zazzarelli, associate director of corporate default research at Moody's in London.

"However, as the current uncertainties unfold, defaults are projected to progressively converge towards their long-term average both in the U.S. and in Europe."