Home' Trinidad and Tobago Guardian : November 15th 2015 Contents SBG14 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt NOVEMBER 15 • 2015
It is close to ten years since America s
housing bubble burst. It is six years
since Greece s insolvency sparked the
euro crisis. Linking these episodes was
a rapid build-up of debt, followed by
a bust. A third instalment in the chron-
icles of debt is now unfolding.
This time the setting is emerging markets.
Investors already have dumped assets in the
developing world, but the full agony of the
slowdown still lies ahead.
Debt crises in poorer countries are nothing
new. In some ways this one will be less dra-
matic than the defaults and broken currency
pegs that marked crashes in the 1980s and
1990s. Today s emerging markets, by and large,
have more flexible exchange rates, bigger
reserves and a smaller share of their debts in
Nonetheless, the bust will hit growth harder
than people now expect, weakening the world
economy even as the Federal Reserve begins
to raise interest rates.
In all three volumes of this debt trilogy, the
cycle began with capital flooding across borders,
driving down interest rates and spurring credit
growth. In America a glut of global savings,
much of it from Asia, washed into subprime
housing, with disastrous results. In the euro
area thrifty Germans helped to fund booms
in Irish housing and Greek public spending.
As these rich-world bubbles turned to bust,
sending interest rates to historic lows, the flow
of capital changed direction. Money flowed
from rich countries to poorer ones. That was
at least the right way around, but this was yet
another binge: too much borrowed too fast,
and lots of the debt taken on by companies
to finance imprudent projects or purchase
Overall, debt in emerging markets has risen
from 150 per cent of GDP in 2009 to 195 per
cent. Corporate debt has surged from less than
50 per cent of GDP in 2008 to almost 75 per
cent. China s debt-to-GDP ratio has risen by
nearly 50 percentage points in the past four
Now this boom, too, is coming to an end.
Slower Chinese growth and weak commodity
prices have darkened prospects even as a
stronger dollar and the approach of higher
American interest rates dam the flood of cheap
capital. Next comes the reckoning.
Some debt cycles end in crisis and recession;
witness both the subprime debacle and the
euro zone s agonies. Others result merely in
slower growth, as borrowers stop spending
and lenders scuttle for cover.
The scale of the emerging-market credit
boom ensures that its aftermath will hurt. In
countries where private-sector indebtedness
has risen by more than 20 per cent of GDP,
the pace of GDP growth slows by an average
of almost three percentage points in the three
years after the peak of borrowing. Exactly how
much pain lies ahead also will depend on local
factors, from the scale of the exchange-rate
adjustment that already has taken place to the
size of countries reserves.
Crudely, most emerging economies can be
put into one of three groups.
The first group includes those for which
the credit boom will be followed by a prolonged
hangover, not a heart attack. The likes of South
Korea and Singapore belong in this category.
So, crucially for the world economy, does
China. It still has formidable defenses to protect
it against an exodus of capital. It has an enor-
mous current-account surplus. Its foreign-
exchange reserves stood at US$3.5 trillion in
October, roughly three times as much as its
external debt. Policy-makers have the ability
to bail out borrowers and show little sign of
being willing to tolerate defaults.
Sweeping problems under the carpet does
not get rid of them, of course. Companies that
ought to go bust stagger on, dud loans pile
up on banks balance sheets and excess capacity
in sectors such as steel leads to dumping else-
where. All this saps growth, but it also puts
off the threat of a severe crisis.
For that risk, look instead to countries in
the second category: those that lack the same
means to bail out imprudent borrowers or to
protect themselves from capital flight. Of the
larger economies in this category, three stand
Brazil s corporate-bond market has grown
12-fold since 2007. Its current-account deficit
means that it relies on foreign capital, and its
political paralysis and fiscal inflexibility offer
nothing to reassure investors.
Malaysia s banks have lots of foreign liabil-
ities, and its households have the highest debt-
to-income ratio of any big emerging market.
Its cushion of foreign-exchange reserves looks
thin and its current-account surplus is forecast
Turkey combines a current-account deficit,
high inflation and foreign-currency-denom-
inated debts that have become more onerous
as the lira has fallen.
The third group of countries consists of
those emerging markets that either will escape
serious trouble or already have gone through
the worst. Of the big ones, India is in healthier
shape than any other big emerging economy
and Russia may surpass expectations. The
ruble already has gone through a bigger adjust-
ment than any other major currency, and the
economy shows tentative signs of responding.
Argentina, a perennial flop but one with little
private debt, also could shine if a reformist
wins the presidency this month.
Such brighter spots aside, everything else
points to another pallid year for the world
economy. The International Monetary Fund
has forecast higher growth in emerging markets
next year, but the lesson of past debt cycles
suggests that another year of slowdown is
Weakness in the developing world, which
accounts for more than half of the global econ-
omy in purchasing-power-parity terms, mat-
ters far more than it once did. Lower growth
in emerging markets hits the profits of multi-
nationals and the cash flows of exporters. Low
commodity prices help oil importers but ratchet
up the pressure on indebted mining, drilling
and trading companies, which between them
owe around US$3 trillion.
Europe s open economy is most exposed to
a cooling in emerging-market demand, which
is why more monetary easing there looks likely.
America s policy dilemma is more acute, how-
ever. The divergence in monetary policy
between it and the rest of the world will put
upward pressure on the dollar, hurting exports
and earnings. Waves of capital may again seek
out the American consumer as the borrower
If so, the world s debt crisis may end up
right back where it started.
@2015 The Economist Newspaper Ltd. Dis-
tributed by the New York Times Syndicate
Debt crisis: The
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