Emerging Markets Are the Canaries in the Credit Mines
The weakness that happens periodically in the debt of developing economies doesn’t always presage bad things happening in the developed world, but in this case it probably does.
There’s rough seas ahead for the credit markets.
Photographer: Marco Bertorello/AFP via Getty Images
Looking at the constant drumbeat of awful headlines from Ukraine, much chatter of a new cold war, the not-very-surprising surge in commodity prices and inflation rates that only go up, you might have wondered why stock markets appear so resilient and government bond yields have dropped so much in recent days. I say the answer is that the broad stock market indexes tell you little about how much European and U.S. banks are probably suffering and how much worse things may get.
My primary worry centers on the hugely important markets for credit in its myriad forms. Thanks to central banks pushing short- and long-term interest rates to nothing in nominal terms and much less than that in real terms, there has been a proliferation of corporate debt, much of it of startlingly low quality. Desperate for yield, investors have taken on ever more credit risk and liquidity risk. Issuance of bonds rated below investment grade in Europe and the U.S. rose to a record last year, according to Fitch Ratings. The market for private debt (also mostly junk and for which there is no public market) has grown tenfold in the past decade.