There is a lot of emerging market debt out there, much of it denominated in currencies other than that of the issuer. From Don Quijones at wolfstreet.com:
The potential to unleash “third phase” of the Global Financial Crisis.
It seems like only yesterday that a cacophony of voices — our own included — was warning about the dire threat posed to global economic stability by unraveling hard currency-denominated emerging market debt. Then, roughly six months ago, everything went quiet.
And the debt began growing again.
So far this year $153 billion of new EM corporate foreign currency debt has been issued, according to Citigroup. That’s 7% higher than the same period last year. No reason to worry, say Citi’s analysts W.R. Eric Ollom and Ayoti Mittra. So-long as the appetite for high-risk debt remains unabated, indefinitely, EM companies should be able to handle their need to roll over their foreign currency bonds and loans.
“The TINA trade (‘There Is No Alternative’) remains a strong force in the market as investors search the world for higher yields in a low rate universe,” the Citi analysts conclude. “We recommend investors remain long the asset class.”
The Third Leg Down
Not everyone’s quite so sanguine. According to a sobering new report launched yesterday by the United Nations Conference on Trade and Development (UNCTAD), a collapse of emerging market debt is not only a very real, present danger; it has the potential to unleash the third leg of the Global Financial Crisis.
This third leg is likely to be even worse than the first two: the collapse of the Subprime market in the U.S., in 2008, and the unraveling of Europe’s sovereign debt markets, between 2010 and, well, today.
Thanks to an unprecedented “deepening of the financial integration” of developing and emerging market economies in recent decades, coupled with “a deluge of financial flows and cheap credit since 2009”, emerging markets are poised for a year of living dangerously, the report warns. The International Monetary Fund (IMF) has already warned policymakers to be alert; UNCTAD now suggests that it is time for them to be “alarmed”:
Alarm bells have been ringing for a while over the exploding corporate debt incurred by emerging market economies. According to the Bank for International Settlements, the debt of non-financial corporations in these economies increased from around $9 trillion at the end of 2008 to just over $25 trillion by the end of 2015, and doubled as a percentage of gross domestic product (GDP) – from 57 per cent to 104 per cent – over the same period.
Between 2010 and 2014 the dollar-denominated debt of non-financial corporations in 13 selected developing countries increased by 40%. During the same period their debt-to-service ratios also soared ‒ a “solid warning indicator of systemic banking crises in the making,” the report warns. Worse still, much of the money that entered developing and emerging economies has fueled real estate and financial asset bubbles rather than long-term productive investment projects.
Insanity Squared
The emerging market debt crack-up has reached such mind-boggling proportions that last year saw the birth of one of the craziest financial creations on earth, available only near the peak of enormous credit bubbles when nothing can ever go wrong: 100-year bonds issued by governments or companies in emerging countries, in currencies they don’t control.
To continue reading: Time to “Be Alarmed” about Emerging Market Debt: UN
