Markets were gripped by the European sovereign debt crisis in 2011, but corporate defaults were surprisingly few during the year, says Moody’s Investors Service.

The rating agency reports that there were only 35 Moody’s-rated corporate issuers that defaulted, on a total of $36 billion of debt in 2011. This was the lowest level in four years, said Sharon Ou, author of the report. “This modest default number stemmed mostly from ample liquidity, low interest rates and the recent surge of refinancing that addressed looming maturities,” she said.

The year’s defaults were led by the transportation sector, which accounted for seven defaults, including American Airlines. By region, defaults remained concentrated in North America with 25 issuers defaulting on $26 billion of debt, and the remaining 10 were from Europe, with $10 billion of debt affected.

While the European crisis didn’t lead to a large number of defaults during the year, the increasing risk did lead to declining credit quality during the year, reflected in Moody’s quarterly ratings drift as measured by the rating upgrade rate minus the rating downgrade rate, which fell from -2.6% to -5.1% in the last quarter of 2011.

Moody’s global speculative-grade default rate ended 2011 at 1.8%, down from 2010’s year-end level of 3.2%. The default rate for all Moody’s-rated corporate issuers fell to 0.8% at the end of 2011 from 1.3% at year-end 2010.

Looking ahead, Moody’s default rate forecasting model predicts a modest rise in the global default rate this year, under the baseline macroeconomic scenario. The default rate is anticipated to rise to 2.8% by December 2012, a level below the historical average of 4.8%.

“The declining trend in high yield default rate, which has lasted for over two years, has probably ended,” says Albert Metz, managing director of credit policy research at the firm. “The current weak macroeconomic climate, falling consumer confidence, and deteriorating corporate credit quality are expected to put upward pressure on the default rate.”

In a more pessimistic scenario, which assumes that the sovereign debt problem materializes and leads the global economy into a double dip recession, the default rate could rise to 8.1%, which would still be below the 2008-2009 peak of 13.6%, says Moody’s.