Euro zone: Has the credit market been wrong before? Yes, on one in three occasions

Currently in the euro zone, credit spreads are widening sharply while companies’ financial situation and balance sheets are decent (very high and rising profits, very low interest payments, declining defaults, improving ratings, deleveraging). A contradiction has therefore arisen between the market for credit (corporate bonds) and the actual financial situation of companies. This suggests either that companies’ financial situation is going to deteriorate rapidly or that the financial markets are mistaken in their analysis of this situation. Have there been cases in the euro zone in the past when a widening of credit spreads has been a mistake (did not correspond to the future evolution of companies’ financial situation) and was subsequently corrected? This happened in 2011 but not during the other increases in credit spreads (2000-2002, 2007-2009), which were followed by recessions and a sharp rise in defaults.