Defaults and volatility ahead

THE global credit landscape is entering a more turbulent phase, with business leaders and investors bracing for a prolonged period of uncertainty.

As tariffs become an increasingly common tool of economic policy, their unpredictable application is creating ripple effects across sectors and geographies – and the credit market is feeling the pressure.

Moody’s Ratings, in a sweeping analysis released over the week, paints a sobering picture of how the evolving trade landscape, especially the recent wave of US tariffs, is likely to affect credit conditions globally.

The message is clear: brace for more defaults, more volatility and a tougher operating environment, particularly for weaker firms.

“Credit conditions have deteriorated sharply over the last month and our baseline scenario anticipates that defaults will be higher than previously expected,” the report states, citing “the higher cost of doing business, more expensive and scarcer funding and persistent uncertainty” as key culprits.

The latest salvo in the ongoing trade tussles came on April 2, when the United States rolled out a raft of new tariffs.

Though some have been delayed, Moody’s says they will weaken credit conditions and defaults will be higher than previously anticipated.

The rating agency took pains to clarify that its outlooks aren’t knee-jerk reactions.

“Our ratings consider numerous factors and scenarios to make them robust to a range of possible outcomes and hence less sensitive to more transient changes,” it notes.

However, it adds a caveat: “When we perceive more material and persistent shifts, we may change specific ratings to reflect our updated views on the ordinal ranking of credit risk.”

And that, it says, may be precisely what’s unfolding now.

“The tariffs and rapidly changing US trade policy presage such a shift, although the credit consequences will likely take several quarters to unfold and any rating actions will be commensurately measured.”

Three channels

From Moody’s vantage point, there are three main channels through which tariffs hit credit quality: trade itself, weakening macroeconomic conditions, and financial-market volatility.

First, the trade effect. Companies selling tariffed goods into the United States are on the frontlines.

Moody’s explains: “Such companies will likely pass some of the cost of tariffs to customers via higher prices, and absorb the rest through lower profit margins.”

But that depends on how elastic the demand is. “This will result in lower profit margins and cash flow with which to service debt.”

And it doesn’t end there. Oversupply from China into other markets may trigger price deflation, causing secondary shocks.

Next, the broader economic fallout.

Moody’s lays out a domino effect: Businesses faced with rapidly changing policy will suspend or slow investment decisions until they feel more confident, while consumers are expected to start to trim discretionary spending and hold back on their own economic decisions.

Combined with higher prices and lower commodity values, this spells slower growth all around.

On the third channel – financial markets – the warning is no less dire.

Moody’s notes that financial markets have reacted very strongly to the tariff escalations, with bond spreads widening (particularly for speculative-grade issuers) and equity prices tumbling.

“Some will struggle to refinance maturing debt and seek to renegotiate terms through distressed exchanges,” it highlights.

And while current spreads haven’t reached past-crisis peaks, the trajectory is worrying.

Most exposed sector

Sectorally, non-financial corporates are most exposed.

“In China, the rates are so large that companies cannot realistically absorb a significant part of the tariffs through margin compression,” Moody’s points out.

Weaker, low-rated firms with thinner financial cushions will feel the pain first and hardest.

For financial institutions and sovereigns, the link is more indirect – via weaker economies, higher refinancing risks and potentially lower government revenues.

The report zeroes in on how different regions and industries will be affected.

In North America, Moody’s sees broad exposure across key sectors.

“The increased cost of inputs will either be borne by the manufacturer in the form of reduced profit margins or will be passed on to the customer through price increases,” it says.

Either way, demand will take a hit.

Supply chain disruptions are another wildcard, with goods possibly piling up at ports because of processing delays, and firms slowing or pausing orders, while waiting for clarity.

Across the Atlantic, Europe is not immune.

“Companies in Europe will be affected through similar risk channels as the United States,” Moody’s says, but it notes that the impact varies by sector and exposure to the US market.

Automakers and chemical producers, already battling headwinds, are particularly vulnerable.

“European autos would be especially challenged if the United States were to lift the exemption from tariffs on Canada and Mexico,” it explains.

Luxury retailers and producers of spirits such as Scotch whisky and cognac could also face demand declines amid general economic malaise.

In Asia Pacific, where countries form the backbone of global supply chains, the ramifications are significant.

“The tariffs are meaningfully credit negative for many companies in Asia,” Moody’s cautions.

Vietnam, Cambodia, Thailand and Taiwan are among the most exposed.

Semiconductor demand may also dip due to softer demand for consumer tech.

“Although chips have been excluded from the higher tariffs for now, we expect demand for consumer electronics and technology hardware overall to fall,” the report points out.

Fiscal discomfort

Sovereigns, especially those with large export exposure to the United States, could find themselves in fiscal discomfort.

Moody’s flags Vietnam, Cambodia and Thailand as particularly vulnerable.

Europe is also on watch. Countries like Ireland and Germany, heavily reliant on value-added exports to the United States, could suffer if tariffs are expanded to include sensitive sectors like pharmaceuticals.

Meanwhile, US state and local governments could face a fiscal squeeze.

“States like Michigan, which rely heavily on the automotive industry and those in the plains region with strong agricultural sectors, will be particularly affected,” Moody’s cautions.

Infrastructure, too, is under strain. US ports that depend on trans-Pacific trade – from Los Angeles to Savannah – could see throughput volumes dip.

Financial institutions aren’t spared either.

“Higher tariffs are relatively more negative for banks in Vietnam, Thailand and Bangladesh,” Moody’s says, due to their exposure to export-reliant sectors.

Globally, weaker growth will hurt loan volumes and margins, while consumer finance and auto lending could be hit disproportionately hard.

Shifting credit tide

In the end, it all comes down to uncertainty.

Moody’s notes: “The inconsistent nature of policymaking and potential for further escalation (or, conversely, de-escalation) of trade tensions mean we have only moderate confidence in our baseline scenario.”

An optimistic view could see tariffs softened or rolled back in negotiations.

But the pessimistic scenario – a failure to find middle ground – could bring stagflation, higher defaults, and even intervention by the US Federal Reserve.

For now, Moody’s is holding the line. But the message is unmistakable: the global credit tide is shifting, and companies need to be ready to ride out the storm.