Weak corporate investment is a bigger concern than a wave of defaults

We look at the situation of companies in the United States and the euro zone. It is often claimed that the corporate default rate is going to rise considerably, due to the sharp increase in corporate debt . But we believe that the rise in the corporate default rate will end up being quite small: To be sure, corporate debt has risen considerably in 2020; but companies’ cash reserves have also risen considerably, so that their debt net of cash reserves has not risen; To prevent a deterioration in their balance sheets, companies have sharply reduced their investments, which explains the absence of an increase in net debt; The public aid received by companies has prevented the fall in profitability that would have normally resulted from the fall in activity. Altogether, it seems that the fall in corporate investment is a much bigger concern than a sharp deterioration in the financial situation leading to a sharp rise in the default rate.