A new record has been broken in Moody’s index for UK credit card charge-offs. The index, based on data from credit card debt included in asset-backed securities it rates, saw write-offs rise to 10.12 percent in June, up by nearly half from a year ago and the highest on record.
Moody’s outlook is bleaker still: charge-offs could reach 12.5 percent by June 2010 as unemployment rises. The inevitable result will be more losses for banks and pain on the high street.
Moody’s has published some interesting research on how European companies’ pension deficits have emerged from the last few months of financial mayhem, and the impact of accounting practices on calculating their current deficits.
Top of the list for investment nous comes Rolls Royce, whose pension assets gained eight percent in 2008 after the company reduced exposure to equities in 2007. Bottom of Moody’s 20-strong sample was Shell, whose pension assets tumbled 29 percent, according to the rating company’s estimates. The average decline was 14 percent.
This decline means that European companies’ pension obligations are on average 93 percent funded — more or less in line with the agency’s forecasts, and far ahead of their U.S. counterparts.
But let’s not get too jubilant just yet.
Moody’s notes that the results have been boosted by accounting rules that allow European companies to discount their pension obligations at a rate derived from high-quality corporate bond spreads—very handy given the spike in yields last year. This crops up as an actuarial gain in the pension footnote.
One European company booked a reduction in its pension deficit of between 15 and 20 percent as a result of actuarial gains, Moody’s notes, while 14 of the 20-strong sample booked reductions of 5 percent or more. (Actuarial gains, of course, aren’t limited to changes in the discount rate, Moody’s stresses).
Nonetheless, the concern is that falling real bond yields, if not matched by rising asset prices, will cause companies’ pension funding levels to fall further—forcing them to record larger deficits and stump up more cash.