Historic Surge in US Corporate Bankruptcies Shakes Financial System

Clear Facts

• A “historic surge” of corporate bankruptcies is unfolding in the U.S., predominantly driven by high interest rates, supply chain issues, and slowing consumer spending.
• S&P Global Intelligence states that 75 companies filed for bankruptcy in June, escalating the total number of bankruptcies in 2023 to 346, a figure considerably higher than seen in the past 13 years.
• Although the Federal Reserve has hinted at cutting rates by the end of the year, high interest rates are expected to remain, posing a potential risk to the financial system.

In an era of uncertainty for American corporations, a record-breaking number of firms are struggling under the weight of mounting debts and soaring interest rates. S&P Global Intelligence revealed a worrying increase in the number of bankruptcies, with 75 companies filing for bankruptcy in June – the highest monthly figure since the initial shock of the COVID-19 pandemic in early 2020.

This upward trend has brought the total number of corporate bankruptcies in 2023 to 346, casting a shadow over the bankruptcy levels seen over the past 13 years.

The previous semi-annual peak occurred in 2010, when 437 companies filed for bankruptcy within the first six months of the year. The concerning rise in bankruptcies this year is attributed to high interest rates, supply chain disruptions, and a decline in consumer spending, according to the S&P report.

The mounting crisis is further aggravated by the Federal Reserve’s aggressive monetary policies aimed at curbing high inflation. The Fed significantly increased interest rates in 2022 and 2023, ending more than a decade of low-cost funding and leaving officials grappling with the decision of when to relax monetary restraints.

Signs of an economic downturn are already apparent, while inflationary pressures seem to be easing. Despite expectations for the Fed to start reducing rates in the autumn, interest rates are anticipated to remain high.

This has prompted calls from economic experts for the U.S. central bank to lower rates sooner, primarily due to concerns that the persistent high interest rates could destabilize the financial system.

Moody’s chief economist Mark Zandi recently expressed, “The economy has weathered the Fed’s higher-for-longer strategy admirably well, but there is a mounting threat that the ongoing pressure will expose fault lines in the financial system.”

He added, “As last year’s banking crisis showed, the relentless strain of high rates can cause parts of the financial system to buckle in ways that are difficult to predict and control.”

From April onwards, rising levels of bankruptcies were reported as companies struggled with high interest rates and started acknowledging that these elevated levels were likely to persist for a longer term.

“Fading hopes of lower interest rates are likely contributing to the increase in filings, as companies that may have held out hope for rate cuts at the beginning of the year come to terms with the reality that they will remain higher for longer,” S&P stated.

Among the high-profile bankruptcies in June were electric-vehicle maker Fisker and Chicken Soup for the Soul, the parent company of DVD rental chain Redbox.

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