Here’s the problem with borrowing a load of cash: It has to be paid back eventually.
That’s what’s happening in emerging economies from Mexico to Brazil and Turkey, which have come to the end of an unprecedented six-year borrowing binge. Financial firms in developing economies repaid a net $15 billion of international debt in the third quarter, while nonfinancial companies issued just $6 billion. Both figures were the lowest since the beginning of 2009, according to a report on Sunday by the Bank of International Settlements.
This shift is significant and signals the beginning of a new era, one in which struggling, developed nations must face the trillions of dollars of international debt they’ve sold, with some painful results. Some debt issuers will default. Investors will take losses. And growth in many fragile economies will slow as money is diverted toward debt payments and away from projects that could bolster local businesses.
This is already starting to happen. Emerging-markets companies are starting to default more often than U.S. borrowers, the first time that’s happened in years. Dollar-denominated debt of developing nations plunged 4.3 percent in the third quarter after stripping out gains from benchmark government rates, the biggest such loss for a similar period since 2011, Bank of America Merrill Lynch index data show.
It’s unlikely that investors will flood back to struggling developing nations anytime soon. Why would they, unless they were promised insanely high yields that these countries realistically can’t afford to pay?
The global economic landscape is shaky, with oil and other commodity prices hovering around the lowest levels in at least six years and curbing revenues for companies and governments in nations including Nigeria, Venezuela and Brazil, among many others. Some Wall Street analysts are seeing a growing chance of recession as soon as next year.
The Federal Reserve is planning to raise U.S. interest rates for the first time in almost a decade, possibly next week, which will make the U.S. a more appealing investment for bond buyers, diverting them away from less-established nations.
And then, of course, there’s all that cheap debt that these nations have sold to investors around the world, which has to be repaid eventually. The face value of dollar-denominated emerging-markets sovereign and corporate debt has roughly tripled since the beginning of 2009, to $1.7 trillion, according to Bank of America Merrill Lynch index data. These emerging nations are just starting to feel the weight of their mountain of debt.
The European Central Bank is still doing whatever it can to keep the global borrowing glut alive, and indeed, BIS data show that companies are selling more debt in euros relative to dollars. But its efforts have some serious limitations. The U.S. capital markets are deeper and generally more stable than Europe’s, and the ECB is struggling to convince bond buyers that it has the ammunition needed to keep bolstering asset prices in the region.
Given the rising uncertainty around the world in the twilight of the Fed’s stimulus and the end of the commodity boom, many investors simply want their money back with perhaps a wee bit of interest. Emerging markets no longer look like a reliable substitute for riskier, developed-market debt. The pain in some of these countries will most likely deepen before it subsides.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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