The trend in credit quality is turning negative in corporates, especially for speculative-grade issuers, as financing conditions tighten. Real estate remains one of the most exposed sectors, given refinancing and valuation developments. We expect the European default rate will rise to 3.75% by June 2024, from 3.40% in August 2023. While signs of deterioration in asset quality are evident, we expect that credit losses for European banks will normalize under our base case and that structured finance ratings will remain robust in the face of modest stress.