From Wolf Richter at wolfstreet.com:
It’s hard to be bullish about the global economy these days” – that’s how National Bank Financial, a division of National Bank of Canada, starts out its report:
Besides China’s tricky rebalancing, which continues to have repercussions across the globe, there’s the growing threat posed by the surging US dollar. The trade-weighted greenback’s over 12% appreciation this year (2015 average versus 2014 average) is the biggest annual appreciation in over 30 years, and that raises the odds of corporate defaults worldwide.
As other currencies have plunged against the dollar, USD-denominated debt owed by corporations, governments, international organizations, and households outside the US gets very expensive or even impossible to service.
Take Petrobras, Brazil’s state-controlled junk-rated oil company with over $130 billion in debt. It’s tangled up in a horrendous corruption scandal and has a host of other problems. Yet last June, it was able to sell 100-year dollar-denominated bonds to investors who clearly weren’t paying attention. Those bonds have since swooned. Much of Petrobras’ production is sold in Brazil at low prices for reis, rather than exported for dollars. And now it has a heck of a time dealing with its mountain of dollar-denominated debt.
It’s not the only one. Something special happened to dollar-denominated debt since the Fed’s QE and ZIRP began, according to a new report by the Bank for International Settlements (BIS):
Since 2008, dollar credit has grown more rapidly outside the United States than inside.
Let that sink in for a moment.
It did so not only because emerging market economies grew faster than the US, but also due “to its substitution for local currency credit, given favorable dollar interest rates and exchange rate expectations as EME firms leveraged up.”
This dollar-denominated debt owed by non-bank borrowers outside the US has grown to $9.8 trillion at the end of the second quarter, up from $9.6 trillion in the first quarter. It has more than quadrupled over the past 20 years. It has nearly doubled since 2008.
To continue reading: World Trips Over the Explosive Dollar
