Tag Archives: Emerging Markets

The Global Financial System Is Unraveling, And No, the U.S. Is Not immune, by Charles Hugh Smith

Posted on September 4, 2018 | Leave a comment

The impending financial crisis will be global, which means the US won’t escape it. From Charles Hugh Smith at oftwominds.com:

Currencies don’t melt down randomly. This is only the first stage of a complete re-ordering of the global financial system.
Take a look at the Shanghai Stock Market (China) and tell me what you see:
A complete meltdown, right? More specifically, a four-month battle to cling to the key technical support of the 200-week moving average (the red line). Once the support finally broke, the index crashed.
Now take a look at the U.S. S&P 500 stock market (SPX):

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Turkey’s Crisis and the Dollar’s Future, by Alasdair Macleod

Posted on August 26, 2018 | Leave a comment

Is the dollar strong or emerging market currencies weak due to flawed macroeconomic policies? From Alasdair Macleod at mises.org:

Last week’s collapse of the Turkish lira has dominated the headlines, and it is widely reported that this and other emerging market currencies are in trouble because of the withdrawal of dollar liquidity. There are huge quantities of footloose dollars betting against these weak currencies, as well as commodities and gold, on the basis the long-expected squeeze on dollar liquidity is finally upon us.

Doubtless Triffin’s dilemma is dominating these speculators’ thoughts, telling them demand for the dollar as the reserve currency is infinite. This article points out that foreign financial entities as a whole already possess most of the excess liquidity created by monetary expansion of the dollar since the Lehman crisis. Admittedly, ownership of dollars is unlikely to be evenly distributed across correspondent banks representing all foreign nations. But this is no reason to say dollars are not under-owned by foreign users, and we must not forget dollars are also available in the foreign exchanges, as always, for credible buyers. Nor must we forget that the reason for the enormous quantity of currency derivatives ($75 trillion in US dollars alone1) is that future demand for dollars is already significantly hedged.

No, the reason certain EM currencies are losing purchasing power is the fault of individual governments and their central banks, who do not seem to realize that their unbacked fiat currencies are valued purely on trust, both that of their own people and on the foreign exchanges. And as we should know, trust is not something to be toyed with.

Furthermore, comments that China is in trouble from trade tariffs and being undermined by a strong dollar are wide of the mark. Geopolitics dominates here. America’s occasional successes in attacking the rouble and yuan are no more that transient pyrrhic victories. She is not winning the currency war against China and Russia. China is not being deflected from her strategic goals to become, in partnership with Russia, the Eurasian super-power, beyond the reach of American hegemony.

This article looks beyond the short-term rush into the dollar, which is driven predominantly by hot money, to gain a more balanced perspective on the dollar’s future.

To continue reading: Turkey’s Crisis and the Dollar’s Future

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Central Banker Observes Sudden “Evaporation” Of Dollar Funding, Warns Of Global Turmoil, by Tyler Durden

Posted on June 5, 2018 | Leave a comment

There was a dollar funding crisis during the last financial crisis, and there will probably be one during the next financial crisis, too. From Tyler Durden at zerohedge.com:

Last October, just as the Fed started shrinking its balance sheet, we published yet another article on what is arguably the biggest threat to not only risk assets, but also the global economy: “The Dollar Funding Shortage: It Never Went Away And It’s Starting To Get Worse Again.”

While hardly a novel problem, we first discussed the return of the dollar funding shortage in March 2015, the fact that global stocks kept rising, and that overall funding conditions remained relatively loose keeping the global economy well-lubricated, prevented said dollar funding shortage from becoming a major concern to policymakers, despite occasional recent hiccups such as the Libor-OIS spread blow out, which both we and Citi explained w as a symptom of the creeping shortage of the world’s reserve currency.

Until now.

In an op-ed published overnight in the FT, a central banker writes that when it comes to the turmoil gripping the world’s Emerging Markets, whether it is the acute, idiosyncratic version observed in Argentina and Turkey, which according to JPM may be doomed…

… or the more gradual selloffs observed in places like Indonesia, Malaysia, Brazil, Mexico and India, don’t blame the Fed’s rate hike cycle. Instead blame the “double whammy” of the Fed’s shrinking balance sheet coupled with the dollar draining surge in debt issuance by the US Treasury.

That’s the message from the current Reserve Bank of India, Urjit Patel, who writes that “unlike previous turbulence, this episode cannot be attributed to the US Federal Reserve’s moves on interest rates, which have been rising steadily since December 2016 in a calibrated manner.” But does that mean that the Fed is not to blame for what increasingly looks like another budding EM crisis? Not at all: according to Patel, the dollar funding shortage “upheaval” stems from what he sees as the confluence of two significant events of which the Fed’s balance sheet reduction is one, while the second is the dramatic increase in US Treasury issuance to pay for Trump’s tax cuts; what is notable is that both events are drastically soaking up dollar liquidity.

To continue reading: Central Banker Observes Sudden “Evaporation” Of Dollar Funding, Warns Of Global Turmoil

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De-dollarization Not Now, by Wolf Richter

Posted on October 12, 2017 | Leave a comment

All sorts of foreign governments, including emerging market governments, are borrowing in dollars. What could go wrong? For one thing, the dollar could strengthen.  But don’t currency rates usually go the direction governments want them to? From Wolf Richter at wolfstreet.com:

USD-denominated debt outside the US hits record – even junk bonds.

China announced today that it would sell $2 billion in government bonds denominated in US dollars. The offering will be China’s largest dollar-bond sale ever. The last time China sold dollar-bonds was in 2004.

Investors around the globe are eager to hand China their US dollars, in exchange for a somewhat higher yield. The 10-year US Treasury yield is currently 2.34%. The 10-year yield on similar Chinese sovereign debt is 3.67%.

Credit downgrade, no problem. In September, Standard & Poor’s downgraded China’s debt (to A+) for the first time in 19 years, on worries that the borrowing binge in China will continue, and that this growing mountain of debt will make it harder for China to handle a financial shock, such as a banking crisis.

Moody’s had already downgraded China in May (to A1) for the first time in 30 years. “The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” it said.

These downgrades put Standard & Poor’s and Moody’s on the same page with Fitch, which had downgraded China in 2013.

But the Chinese Government doesn’t exactly need dollars. On October 9th, it reported that foreign exchange reserves – including $1.15 trillion in US Treasuries, according the US Treasury Department – rose to $3.11 trillion at the end of September, an 11-month high, as its crackdown on capital flight is bearing fruit (via Trading Economics):

So why does China want these $2 billion in US dollars? For one, they’re still cheap, given the low yield, which is expected to rise as the Fed has started to unwind QE. And two, China might be interested in creating a benchmark for dollar-bond trading in China that could help set prices for Chinese corporate debt denominated in dollars. And there’s a lot of it.

To continue reading: De-dollarization Not Now

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Time to “Be Alarmed” about Emerging Market Debt: UN, by Don Quijones

Posted on September 22, 2016 | Leave a comment

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

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Will 2017 Be The Year Of The EM Corporate Debt Crisis? by Tyler Durden

Posted on December 6, 2015 | Leave a comment

SLL thinks the emerging market corporate debt crisis has already arrived, and this article has a good summary of the situation. From Tyler Durden at zerohedge.com:

Back in October we brought you “Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can’t Pay The Interest On Their Debt,” in which we highlighted a report from Macquarie that contained the following rather disconcerting data point: “…more than half of the cumulative debt in the Chinese commodity sector was EBIT-uncovered in 2014.”

That’s right, “more than half,” and before you say “well, it is commodities and it is China after all,” consider that for the entire universe of CNY22 trillion in corporate debt, the “percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year.” So, nearly a quarter.

In November, we revisited the idea (presented in these pages more than 18 months ago), that China may have reached its dreaded Minksy Moment, as Chinese corporates are set to take out some CNY7.6 trillion in new loans this year just to pay interest on their existing borrowings. As Morgan Stanley put it last year, China looks to be reaching “the point at which Ponzi and speculative borrowers are no longer able to roll over their debts or borrow additional capital to make interest payments.” You know what happens next, and we’re already seeing it as the number of onshore defaults accelerates.

This is part of a wider discussion about EM corporate debt in a world where EM FX has plunged and investor confidence in the space is rapidly deteriorating in the face of low commodity prices, a strong USD, a looming Fed hike, and a series of idiosyncratic political risk factors playing out from Brasilia to Ankara to Kuala Lumpur.

With that in mind, Deutsche Bank is out with a new special report on EM debt which has quite a bit of useful color on exactly where things stand for corporate borrowers across a variety of emerging economies.

To continue reading: Will 2017 Be The Year Of The EM Corporate Debt Crisis?

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Brazil’s Disastrous Debt Dynamics Could “Create Contagion” For Emerging Markets, Barclays Warns, by Tyler Durden

Posted on November 22, 2015 | Leave a comment

From Tyler Durden at zerohedge.com:

Last week, we got the latest round of abysmal economic data out of Brazil. To summarize: GDP is in “free fall mode” (to quote Barclays), inflation hit double digits for the first time in over a decade, and unemployment soared to 7.9% in August, up sharply from just 4.3% a year earlier.

Put simply: it’s a full on economic meltdown.

The situation is made immeasurably worse by the country’s seemingly intractable political quagmire. The standoff between President Dilma Rousseff (who has been accused of cooking the fiscal books) and House Speaker Eduardo Cunha (who has been implicated in a kickback scheme tied to Petrobras) has led to a veritable stalemate that’s made it exceedingly difficult for Rousseff and her embattled finance minister Joaquim Levy to push through badly needed austerity measures.

Rousseff scored a victory on the austerity front on Wednesday when lawmakers approved her veto of a bill that would have raised retirement payments alongside the minimum wage, but this is an uphill battle and while incremental wins may be enough to give the beleaguered BRL some temporary respite, the medium- to long-term outlook is abysmal.

As Brazil continues to muddle through what has become a stagflationary nightmare, Barclays is out with a fresh look at the country’s debt dynamics and unsurprisingly, the picture isn’t pretty.

The road ahead depends on fiscal policy, Barclays begins, and that, given the current dynamic, is not a good thing. “Even if politics were uncomplicated and policy unconstrained, Brazil would still face enormous challenges adjusting to far less supportive local and global conditions,” the bank notes, referencing the now familiar laundry list of EM problems including slumping commodity prices, lackluster demand from China, the yuan deval (bye, bye trade competitiveness), and the incipient threat of a Fed hike and thus an even stronger USD.

“Investors are also grappling with the prospect of a prolonged, unsustainable fiscal policy framework,” Barclays adds.

To continue reading: Brazil’s Disastrous Debt Dynamics Could “Create Contagion” For Emerging Markets

 

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Emerging-Market Credit Downgrades Soar to Overtake 2014 Tally, by Ye Xie

Posted on October 31, 2015 | Leave a comment

As credit goes, so goes the economy? From Ye Xie at bloomberg.com:

S&P: 224 rating cuts so far this year, more than 206 in 2014

28% of companies have negative outlook or are on watch list

Investors be warned. There have been more credit-rating downgrades in developing nations in the first nine months of this year than in the whole of 2014 and the outlook keeps getting gloomier, according to Standard & Poor’s.

An economic slowdown and lower commodity prices are to blame, said Diane Vazza, head of S&P’s Global Fixed Income Research Group, in a report Wednesday. S&P cut the ratings for 88 bonds sold by developing countries and companies in the third quarter, including Brazil, Zambia and Ecuador, while raising the grades for 22 securities. That brings the total number of downgrades to 224 this year, compared with the 206 cuts in 2014.

The ratings cuts will continue to overwhelm emerging markets in the coming months. As of Sept. 30, about 28 percent of companies in developing nations have a negative outlook or are on the watch list for potential downgrades, compared with 24 percent in the second quarter, the report showed.

S&P is not alone in sounding the alarm. UBS Group AG’s Bhanu Baweja, the strategist who correctly called this year’s rout in developing nations, is also concerned. The one-month long rebound in emerging-market currencies and stocks is poised to reverse, he said.

Brazil’s Downgrade

Latin America dominated the downgrades in the quarter after S&P stripped Brazil’s investment-grade rating last month.

The number of defaults in emerging markets this year increased to 17, the highest since 2012, after five more companies failed to make goods on debt payments in the third quarter, including Indonesian mining company PT Berau Coal Energy Tbk and Brazilian sugar producer Tonon Bioenergia S.A.

Emerging-market stocks fell to a two-week low and currencies weakened on Wednesday after the Federal Reserve said the U.S. economy continues to expand at a “moderate” pace, bolstering speculation that policy makers may increase benchmark borrowing costs this year.

http://www.bloomberg.com/news/articles/2015-10-28/emerging-market-credit-downgrades-soar-to-overtake-2014-tally

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Credit is Blowing Out, by Tyler Durden

Posted on September 30, 2015 | Leave a comment

Credit spreads are widening, the junkier the credit the greater the widening, and default fears stalk the bond market. You’d think there was a debt deflation going on or something. Two from Tyler Durden at zerohedge.com:

EM Credit Risk Blows Out Dramatically Amid FX Bloodbath, Fed Fears, Political Risk

In the wake of the global commodities rout which recently saw prices touch their lowest levels of the 21st century, there’s been no shortage of commentary (here or otherwise) on the pain that’s been inflicted on commodity currencies and by extension, on EM.

As it stands, the world’s emerging economies face a kind of perfect storm triggered by a combination of the following factors: falling commodity prices, depressed Chinese demand, and the threat of an imminent Fed hike. All of this has contributed to capital outflows, which has in turn led some reserve managers to begin liquidating their store of USD-denominated assets to help offset the bleeding and indeed, it now looks as though Brazil will eventually be forced to capitulate and dip into the reserve cookie jar to help arrest the BRL’s terrifying slide.

All of this is of course complicated by idiosyncratic political risks.

Take Malaysia for instance, where the 1MDB scandal threatens the political career of Prime Minister Najib Razak.

Or Brazil, where President Dilma Rousseff’s abysmal approval rating and a fractious Congress have made implementing desperately needed austerity measures virtually impossible.

And there is of course Turkey, where Recep Tayyip Erdo?an has effectively plunged his country into civil war in order to preserve AKP’s dominance and pave the way for constitutional amendments that will allow him to consolidate his power.

The risks facing EM are in fact so acute and closely watched that the threat of accelerating capital outflows effectively forced the Fed to delay liftoff earlier this month.

To continue reading: EM Credit Risk Blows Out Dramatically

BofA Issues Dramatic Junk Bond Meltdown Warning: This “Train Wreck Is Accelerating”

On Tuesday, Carl Icahn reiterated his feelings about the interplay between low interest rates, HY credit, and ETFs. The self-feeding dynamic that Icahn described earlier this year and outlined again today in a new video entitled “Danger Ahead” is something we’ve spent an extraordinary amount of time delineating over the last nine or so months. Icahn sums it up with this image:

The idea of course is that low rates have i) sent investors on a never-ending hunt for yield, and ii) encouraged corporate management teams to take advantage of the market’s insatiable appetite for new issuance on the way to plowing the proceeds from debt sales into EPS-inflating buybacks. The proliferation of ETFs has effectively supercharged this by channeling more and more retail money into corners of the bond market where it might normally have never gone.

Of course this all comes at the expense of corporate balance sheets and because wide open capital markets have helped otherwise insolvent companies (such as US drillers) remain in business where they might normally have failed, what you have is a legion of heavily indebted HY zombie companies, lumbering around on the back of cheap credit, easy money, and naive equity investors who snap up secondaries.

To Continue Reading: B of A Issues Dramatic Junk Bond Meltdown Warning

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Rousseff Coup Could Sink Brazil, Emerging Markets, from Shock Exchange

Posted on September 21, 2015 | Leave a comment

From Shock Exchange via zerohedge:

Rousseff Coup Could Sink Brazil, Emerging Markets

Brazil’s President Dilma Rousseff’s approval rating has plummeted to 8% amid the country’s worst recession in two decades. Her job is at risk too. Earlier this week opponents filed a petition to impeach Rousseff due to allegations of corruption by former president Luiz Inacio Lula da Silva at oil giant Petrobras of nearly $2 billion:

This week opponents of Ms Rousseff, incensed by allegations that “pixulecos” mostly involving ruling coalition politicians have cost Petrobras at least R$6bn (US$1.5bn), took their campaign to congress by filing a petition for impeachment with the speaker of the lower house Eduardo Cunha … The petition from Mr [Helio] Bicudo, which was backed by the opposition in congress, marks the start of what could be a long process to try to topple the former Marxist guerrilla only nine months into her second four-year term.

Rousseff – hand-picked by Lula da Silva to succeed him – appears to be caught up in da Silva’s backdraft. Opposition parties also claim she violated Brazil’s fiscal responsibility law when she doctored government accounts to allow more public spending prior to the October election last year. Rousseff in turn described the attempt to use Brazil’s economic crisis as an opportunity to seize power a modern day coup.

Inopportune Time For A Coup

Petrobras In Dire Straits

Political turmoil could not have come at a worst time. The Petrobras debacle has been a point of contention for the populace. While the elite profited from bribes and kickbacks at the state-owned oil giant, Petrobras is laying off workers and cutting supplier contracts in order to stem cash burn.

And those efforts may still not be enough to stave off bankruptcy. With $134 billion in debt – $90 billion of it dollar-denominated – Petrobras is the world’s most-indebted oil company. With oil prices 60% below their Q2 2014 peak, Petrobras will likely crumble under its debt load.

Budget Requires All Hands On Deck

Brazil’s fiscal picture is not much better. The economy contracted nearly 2% in Q2 and the Brazilian real has depreciated against the U.S. dollar by nearly 40% over the past year. That said, the country will find it difficult to grow revenues amid declining commodities prices. Including interest payments, the country’s budget deficit was projected to grow to 8%-9% of GDP, prompting S&P to downgrade the Brazil to junk status:

To continue reading: Rousseff Coup Could Sink Brazil

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