Back when the U.S. Federal Reserve was doing whatever it could to keep credit flowing, companies and governments in emerging markets went on a borrowing spree in dollars. Now, with the Fed changing course and the U.S. currency rising, all that dollar-denominated debt is becoming one of the weakest links in the global financial system.
In the years after the 2008 financial crisis, lending dollars in emerging markets looked like a great deal all around. Borrowers benefited from interest rates lower than those they would pay in their local currencies, and global investors reaped better returns than they could elsewhere. The debtors seemed a safe enough bet: Their assets and revenues were ample enough in dollar terms, thanks in part to the relative weakness of the U.S. currency -- and, for energy-exporting countries, the high price of oil.