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THE Sharper Image store on Manhattan's West 57th Street is sharp no more: its last state-of-the-art massage chairs and stylish humidifiers have been put in storage and its windows papered over. A few doors away, the assistant in the Sharper Image-like Brookstone shop seems unusually desperate to make a sale. In between, huge posters adorn the storefront of Metropolitan, an antique shop, proclaiming that it is “Going Out of Business”.

The economic downturn has struck at the heart of the world's shopping capital, and not even the influx of foreigners taking advantage of the weak dollar has been enough to save Sharper Image or its neighbour. Unlike the fashion houses along the street, neither was helped by the fact that their big-ticket items could not easily be carried onto a plane. But even Bergdorf Goodman, a nearby luxury department store, reported weak sales in August.

Sharper Image filed for bankruptcy protection in February, and has since been liquidating itself, getting even lower prices for its assets than it had hoped. Several other well-known retailers have since gone bust. Steve & Barry's, a casualwear retailer that is a core tenant of numerous shopping malls, terrified commercial-property investors when it entered bankruptcy protection in July. It emerged in August with new private-equity owners and a plan to close 103 of its 276 stores. Linens 'n Things filed in May, and at first hoped to reorganise itself and leave bankruptcy. After the collapse of a planned sale to Cerberus, a private-equity firm, it now plans to liquidate itself, with closing-down sales due to start at its remaining stores on October 16th.

These failures have contributed to a rise in bankruptcy filings in 2008 that is showing every sign of accelerating. Even before September's record-breaking financial-sector bankruptcy of Lehman Brothers, with assets of well over $600 billion, and the technical bankruptcy of Washington Mutual en route to its acquisition by JPMorgan Chase, there had already been more bankruptcies this year than in 2007. By May corporate borrowers had defaulted on 28 high-yield bonds (formerly and perhaps again to be known as “junk”), compared with 21 such defaults in the whole of 2007, according to a recent report by the corporate-renewal group at Bain & Company, a consultancy.

Even before the recent intensification of the financial crisis, which has made it harder and costlier for even the best-run companies to get credit, Bain forecast that 4.8-5.9% of American high-yield bond issuers would default this year, up from 0.9% last year, with the number of large bankruptcies (companies with assets of over $100m) rising to 50-75, from 13 in 2007.

Admittedly, last year's total was unusually low, and Bain's forecast could be seen as nothing worse than a return to normality. But what the credit markets are now pricing in to bonds is far nastier than that. For the first time since late 2002, the average spread between high-yield corporate bonds and Treasuries now exceeds 1,000 basis points—which, for an individual bond, usually earns it the title “distressed”, implying a probability of nearly 25% of default within the following 12 months.

No doubt some of that average spread reflects the lack of liquidity in today's financial markets. A somewhat better indicator of the market's feelings about the probability of default is the number of individual corporate-bond issues trading at least 1,000 basis points above Treasuries, says Martin Fridson of Fridson Investment Advisors. This is now at a record level of 45% of all high-yield issues, up from 29% on September 11th this year and 10% at the start of January. The face value of distressed American corporate high-yield debt is now $328 billion, up from $59 billion in January. Retailers loom large among the firms at risk, which range from casinos to carmakers (though Detroit's Big Three, at least, look slightly less fragile after last week's $25 billion government-loan deal).

Once a bond becomes distressed it has nearly 20 times more chance of defaulting in the following 12 months than a non-distressed high-yield bond, says Mr Fridson, who calculates that on past trends the market is currently pricing in a default rate of 12.4% over the next 12 months, compared with an actual default rate of 3.4% in the 12 months to September. In the two previous recessions the percentage of actual defaults peaked at 11.59% (in January 2002) and 13% (June 1991). Mr Fridson fears that if the economy suffers a recession as deep as that in the early 1990s, the default rate will be far higher, because the mix of high-yield bonds is now far riskier.

One mildly encouraging piece of news, says Edward Altman, an economist at New York University, is that so far this year there have been fewer defaults and bankruptcies than might have been expected given the deteriorating economy. That is because many firms took advantage of generous credit markets in recent years to refinance at low rates, with less onerous covenants than in the past and “toggle” clauses that gave them the option of automatically adding interest bills to the sum borrowed rather than paying it. Such terms are no longer available, and in the next couple of years hundreds of billions of dollars of corporate bonds and loans will need to be refinanced, says Mr Altman. He predicts default rates over the next 12 months of 8-11%, depending on the “wild card of the severity of the recession”.

Another wild card is the behaviour of private-equity firms, which now own some of the most highly leveraged companies. In the recession of the early 1990s, the bursting of the leveraged-buy-out bubble exacerbated the bankruptcy problem and its overall impact on the economy. A study by Steven Kaplan and Jeremy Stein of the buy-outs done at the peak of the bubble (1987-88) found that around one-third went bust or needed restructuring by 1991.

Though private-equity firms claim to be far better run today, and many of them still sit on large cash piles, there is a danger that “today is déjà vu all over again,” says Josh Lerner of Harvard Business School. The $2 billion injected into Washington Mutual in April by TPG represents the biggest-ever single loss by a private-equity firm—and it occurred in less than six months. Already this year at least 32 significant private-equity-backed firms have gone bust, says Mr Altman. Never has there been a greater need for that stress-relieving Sharper Image massage chair.