The world remains mired in debt: Your New Year’s resolutions should include playing close attention to credit risks in your industry

By Ron Doyle

Hallelujah, the recession in Canada is over – the GDP grew by 0.1%! However the real question: Is the risk of bad debt losses increasing or decreasing on a global basis?

The number of banks in the USA that have failed in 2009 has reached 140. This is a symptom of weakness in the American banking system. Yet, what is happening with banks in other countries around the world, such as in Mexico, Russia, and the United Kingdom? How many of these banks have exposures to sovereign debt in countries like Dubai or Greece, and how are governments going to finance the expanding deficits?

It appears that because of the deficits, some countries, like the United Kingdom, and even the USA, may find their debt ratings reduced in future, which will increase the cost of borrowing and make it more difficult to find buyers for their ballooning debt.

There is an immense amount of debt held today by individuals, companies and governments, all which will have to be refinanced in coming years. After previous recessions, business failures increased rather than decreased. This is mainly because, after a recession, companies that have experienced problems yet still survived then have difficulty refinancing debts incurred during the less prosperous period.

The degree of uncertainty faced by all companies going forward into 2010 should be addressed proactively. The last two years have shown that credit risk has been under-valued by many financial managers. These professionals should be wide awake now and paying close attention to specific credit risks in their industries.

(Ron Doyle is a founder of Millennium CreditRisk Management – credit and political risk insurance specialists – www.mcm.ca. ICBA is the world’s largest team of independently-owned, specialist trade credit insurance brokerages. Partners combine local service with global coordination to provide credit and political risk insurance solutions for multinational companies.)