Easing Tariff Tensions Provide Relief, But This Could Prove Temporary

Baseline: S&P Global Ratings Credit Research & Insights expects the European trailing-12-month speculative-grade corporate default rate to fall to 3.6% by March 2026.  This would be a decline from the 4.1% default rate for the 12 months ended March 2025 (see chart 1).

The U.S. administration's 90-day pause related to its recent tariff proposals has encouraged optimism that the trade conflict may not be that damaging for global credit markets. But the negotiation processes are far from over. The U.K. has been the first to reach an outline agreement with the U.S., though this is far from a broader easing of global tariffs, or even resembling pre-April 2 trade relationships, which we believe won't return.

The direct negative impact on Europe appears--at this time--to be comparably less than other U.S. trading partners. Supporting consumers and issuers, interest rates have continued to decline, with EU policy rates closer to their neutral levels, while inflation has been falling. The euro has strengthened, which should continue to help push inflation down.

Given the overall lack of clarity, combined with weaker consumer and business confidence, we anticipate defaults could remain near their current levels by next year, though some increases or declines along the way are likely.

Chart 1

Optimistic scenario: We forecast that the default rate could fall to 2.5% by March.  While some level of tariffs by the U.S. is expected, if they are largely limited to 10%, and there is no retaliation, the negative impact could be mitigated for most speculative-grade European issuers. Still, this scenario would depend on economic growth in Europe exceeding our economists' base-case expectation.

Pessimistic scenario: We forecast that the default rate could rise to 5.25%.  In this scenario, after the 90-day pause on U.S. tariffs, the U.S. administration imposes the tariff levels on European countries that it proposed on April 2. Thus far, the U.K., which is the largest contributing country to the speculative-grade population in Europe, has reached an agreement limiting tariffs on U.K. goods entering the U.S. to 10% (with exceptions for specific imports), but this development has been short on detail.

Retaliation by the EU is still a possibility, which could produce even higher cross-border tariffs than already proposed. In this situation, global demand and consumer confidence would sink, with weaker, consumer-reliant industries suffering most.

Europe Sees Some Tailwinds

Although Europe has been hit less hard by the U.S. administration's tariff moves than other regions, Europe arguably has had the biggest negative turn in sentiment this year. Some of this is understandable given the region has more at stake with its relationship with the U.S. other than trade--namely, the future of mutual defense agreements and efforts, especially amid the Russia-Ukraine conflict.

But by other measures, Europe is arguably benefiting currently. We expect inflation to continue declining this year, in no small part due to the recent appreciation of the euro and pound (see chart 2). The recent strengthening of both currencies has been the result of international investors' growing fears about the role of U.S. Treasuries as a global safe-haven and benchmark.

At the same time, interest rates have been falling, largely led by the European Central Bank (ECB). For the private sector, lower rates are helping to reduce the burden of servicing debt, particularly for corporate loan issuers whose benchmarks are floating rates tied closely to policy rates.

Chart 2

As of April 1, debt rated 'CCC'/'C' maturing through year-end 2029 stood at €99 billion (see chart 3), slightly below where it was at the beginning of the year (€102.1 billion). This remains significantly above outstanding 'CCC'/'C' rated debt at the beginning of 2024, when €63.4 billion in outstanding debt was coming due through the following five years (2024-2028).

However, much of the increase in maturing debt among the lower ratings is concentrated. Around one-third (€32.5 billion) was issued by two organizations downgraded to 'CCC'/'C' in 2024: Altice and Ardagh, leaving €66.4 billion among smaller issuers--more comparable to the total at the start of 2024.

Looking beyond the 'CCC'/'C' category, near-term speculative-grade maturities appear largely manageable, with only €41.5 billion coming due in the remainder of 2025 and another €126.5 billion due in 2026. Broader market conditions have become more challenging in recent months, but it isn't until 2028 that speculative-grade maturities expand dramatically, to €270.6 billion.

Chart 3

Near-term maturities are concentrated among only a few larger sectors (see chart 4). Telecommunications leads this year's speculative-grade total with just over €8.8 billion due. It ranks high among 'CCC'/'C' maturities as well.

However, given our default rates are based on issuer count and not debt amounts, the top three sectors in terms of near-term maturing debt account for only 11.3% of the speculative-grade population and 20.3% of 'CCC'/'C' rated issuers. Well over half of the 'CCC'/'C' total is attributable to consumer products alone.

Chart 4

Primary Markets Take A Step Back In April

In Europe, combined speculative-grade bond and leveraged loan issuance started the year off well (see chart 5). Bond and loan issuance totaled €78 billion through March, roughly in line with the €76 billion through March 2024. But the quickly deteriorating trade environment that led to increased market volatility pushed April issuance down to only €10 billion. As a result, cumulative issuance through April--at €88 billion--was off last year's pace by roughly €20 billion.

Issuance has started to rebound in May, but European markets remain skittish compared with other regions' recent enthusiasm.

Chart 5

The relative risk pricing of both bonds and loans (via spreads) reflects markets' still declining credit risk perceptions (see chart 6). The relative risk of holding corporate debt can be a strong indicator of future defaults because companies face pressure if they're unable to refinance maturing debt or service existing debt.

In broad terms, speculative-grade spreads have been good indicators of future defaults based on a roughly one-year lead time. Given current spreads, our baseline default rate forecast of 3.6% is above what the historical trend suggests. Spreads and yields widened somewhat in April as a result of the deteriorating trade environment, but the changes have been historically modest thus far. And in May, we've seen spreads tighten.

However, in contrast to spreads, current yields remain elevated (particularly on loans), increasing the all-in costs of debt that issuers must contend with, regardless of relative risk perceptions. In our view, since the start of the current rate-hiking cycle in 2022, the trend in defaults has been more similar to the trend in yields rather than spreads.

Chart 6

Considering broad measures of financial market sentiment, economic activity, and liquidity, the average speculative-grade bond spread in Europe was about 304 basis points (bps) in March, less than half our estimate of 628 bps (see chart 7). The gap between the actual spread and the estimated spread implies that bond markets may be overly optimistic. It also supports the argument that yields, rather than spreads, are the better indicator of financial stress in current conditions.

Chart 7

Credit Momentum Remains Stable, For Now

Credit performance has remained largely stable and resilient since 2022, and it's far from the momentum declines that preceded the 2009 and 2020 default cycles--indicating that there are no major spikes in defaults ahead.

In the 12 months ended March 2025, speculative-grade credit quality continued to improve slightly. Net rating actions stayed positive, but only barely. Negative net bias (percentage of issuers with negative outlooks or ratings on CreditWatch negative) implied more downgrades ahead, but it was at its lowest level in the last eight quarters (see chart 8).

Still, net rating actions were only slightly positive in the first quarter. If the global trade situation deteriorates further, net upgrades may give way to net downgrades.

Chart 8

The rates of downgrades and net negative bias have tended to lead movement in the default rate by several quarters. Although credit quality among speculative-grade issuers has generally improved since 2021, that hasn't been enough to make up for the declines during 2020. As a result, speculative-grade issuers are still much more vulnerable than they've been historically (see chart 9).

The 'CCC'/'C' category has experienced higher defaults than is typical, historically. And because many of these defaults are distressed exchanges, issuers reemerging from such transactions typically receive a subsequent rating in this category within a short time, keeping the proportion of 'CCC'/'C' issuers high.

Chart 9

The share of speculative-grade issuers rated 'B-' and lower declined slightly in first-quarter 2025 but remained significantly above the long-term average.

We classify issuers rated 'B-' and below with negative outlooks or on CreditWatch negative as weakest links. They typically carry the highest default risk, with an overall default rate of approximately 8x that of the broader speculative-grade population. As a result, we monitor these issuers and their sectors regularly.

There were 45 European weakest links as of March 31, 2025, down by five from Dec. 31, 2024 (see chart 10). However, the count of more vulnerable issuers in the 'CCC'/'C' category is nearly unchanged.

Chemicals, packaging, and environmental services lead the weakest links count with seven, followed by a number of sectors with four weakest links each. Among these, telecommunications stands out with all four being rated 'CCC' and below.

The number of weakest links in chemicals, packaging, and environmental services is unchanged from three months ago, underlining heightened risk in this sector. The petrochemical sector is set to remain in a prolonged cyclical trough this year as a general malaise in key markets, such as housing and auto, as well as slower growth in key regions leads to weaker demand. Vulnerabilities are exacerbated by uncertainties around the trade outlook and U.S. tariffs, which are likely to have a direct impact on most European chemical producers.

While chemicals, packaging, and environmental services has the highest number of weakest links, speculative-grade-rated debt maturing over the course of 2025 is relatively low, at €1.7 billion, and predominantly rated 'B' and above.

Chart 10

How We Determine Our European Default Rate Forecast

Our European default rate forecast is based on current observations and expectations of the likely path of the European economy and financial markets.   This report covers financial and nonfinancial speculative-grade corporate issuers. The scope and approach are consistent with those of our default and rating transition studies. In this report, our default rate projection incorporates inputs from S&P Global Ratings economists that also inform the analysis of our regional Credit Conditions Committees.

We determine our default rate forecast for speculative-grade European financial and nonfinancial companies based on a variety of quantitative and qualitative factors. The main components of the analysis are credit-related variables (for example, negative ratings bias and ratings distribution), the ECB bank lending survey, market-related variables (corporate credit spreads and the slope of the yield curve), economic variables (the unemployment rate), and financial variables (corporate profits).

For example, increases in the negative ratings bias and the unemployment rate positively correlate with the speculative-grade default rate. As the proportion of issuers with negative outlooks or ratings on CreditWatch with negative implications increases, or the unemployment rate rises, the default rate usually increases.

This report covers issuers incorporated in the 31 countries of the European Economic Area, Switzerland, and certain other territories, such as the Channel Islands. The full list of included countries is: Austria, Belgium, the British Virgin Islands, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, Ireland, the Isle of Man, Italy, Jersey, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Monaco, Montenegro, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, and the U.K.

Related Research

• Global Tariff Tracker: Rating Actions As Of May 16, 2025, May 20, 2025
• Global Credit Conditions Special Update: U.S.-China Tariff De-Escalation Brings Some Temporary Relief, May 15, 2025
• Corporate Results Roundup Q1 2025: Sentiment slumps and earnings estimates erode amidst tariff tensions, May 13, 2025
• Global Macro Update: Seismic Shift In U.S. Trade Policy Will Slow World Growth, May 1, 2025