The collapsing fortunes of commodity exporters are putting increasing prere on companies from the emerging markets, which have borrowed more than a trillion dollars in dollars, euros and yen since 2009
The bank for international settlements (bis), has for years acted as perhaps the most important reminder of the financial markets. For years, she has also been increasingly harsh in her criticism of the expansionary monetary policy of the leading central banks, emphasizing in particular the consequences for the emerging markets. In this way, the dollars, euros and yen available in abundance were preferentially channelled to the emerging economies, where they led to exaggerations, misinvestment and, above all, excessive indebtedness, which would have disastrous consequences as soon as the international willingness to finance declined. Specifically, the bis has been warning for years about a phenomenon known in financial economists as the "original sin" (erbsunde) – the debt in a different currency than the one in which the revenue is generated.
554 billion dollars in foreign-held bonds
As the bis notes in its latest quarterly report, in the current financial cycle, it was mainly large, internationally active emerging market corporates that took advantage of cheap funding opportunities, iing $554 billion in international debt in foreign currency between 2009 and 2013. Add to this cross-border bank lending, of which $1.1 trillion had flowed to china, $311 billion to brazil, and just over $200 billion each to india and korea at the end of june 2014. The statistics also reflect only a small part of the obligations, since large companies often borrow through subsidiaries in offshore financial centers that do not appear in them.
In any case, the total debt of em companies could easily exceed one trillion dollars, which could also cause considerable difficulties for international lenders in the event of a crisis. In the process, the money was formally thrown at the companies, which, according to the bis, resulted in "absurdly low risk premiums" the statistics were not printed in the financial statements, which means that the lenders were not rewarded for their risks, which may soon be realized.
Dollar loans for financial speculation
If the em companies had invested these funds in projects that generate enough foreign currency to service their debts, this would not have been a particular problem. However, as the bis warns, substantial parts of this foreign currency debt were invested in projects such as domestic real estate, which do not generate foreign currency revenues, or used for financial speculation and lent to third parties.
The inflow of foreign currencies had also strengthened the respective national currencies, making the borrowers all the more vulnerable should international investors lose confidence and want to recover their funds, or rather, should they want to be repaid. Be unwilling to refinance maturing bonds. In the gdp scenario, moreover, currencies would continue to collapse at an increasingly dynamic pace, making foreign debt unpayable for more and more borrowers and potentially leading to disaster.
First of all, the affected emerging economies were then hit by the crisis, but this could also spread internationally, which is why the bis has for years considered the emerging markets as the most probable outlet of the next world financial crisis. This danger is obviously exacerbated by the fact that many em companies are active in the raw materials sector, which has long been suffering from the anamic demand in europe and japan, and which has been joined this year by a significant drop in china’s growth rates, which is still hardly being compensated for by the us economy, which is only just starting to pick up. Commodity exporters have therefore been suffering from falling prices for a long time, and this is compounded by the emergence of a strong player in the oil/gas sector in the form of north american shale production, which, incidentally, has been responsible for around 80 percent of us job growth over the last four years.
As the dollar has been getting stronger and stronger since the end of april due to the economic recovery and the end of bond purchases by the u.S. Federal reserve, while commodity prices have been falling, the prere on em companies indebted in dollars has been increasing visibly and was soon to find its first victims in the course of the collapse in the price of crude oil, which for the time being will primarily affect companies from the crude oil exporting countries. Thus, almost one-fifth of the companies in the "msci emerging markets index" from oil-exporting countries, while their share in the "msci frontier markets index", the share of the russian market, which includes the em countries that are further behind economically, is as high as 55 percent. Consequently, it is not surprising that since summer twenty and. The bis has warned for so long that the russian economy is about to lose three percent of its value.
Rbi-russia loans to 40 percent in foreign currency
Russian companies are currently particularly hard hit by this. For example, of around ten billion euros in loans granted by wiener raiffeisenbank international (rbi) in russia, almost 40 percent are not denominated in rubles, which means an increase in the debt burden of around 50 percent for the debtors since the beginning of the year. According to the rbi, debtors had digested the 20 percent drop in the ruble in the first three quarters relatively well, but the latest slump of another 30 percent may be harder to swallow.
Now, putin does seem quite inclined to give important or. The question is, however, whether it has sufficient funds at its disposal to do so. The russian central bank reported that as of 1. January 2014, it held around $510 billion in foreign exchange reserves, and in november it had also reported a substantial1169.5 tonne gold reserve. On 12. December, it was down to $414.6 billion, of which it had since spent a further ten billion on steel purchases. A general "run" however, at least in the case of the bonds, neither redemptions nor coupon payments are due until the end of the first quarter of 2015, which gives companies and banks a grace period in which they can only hope that conditions on the financial markets will calm down again by then.
Increasing nervousness in financial markets
However, the bis also sees signs of growing nervousness and wonders how long financial markets will remain in expansion mode in the face of increasing turmoil. The south african rand, the mexican peso and the indonesian rupiah have all lost more than 15 percent against the dollar since the summer, while countries without significant commodity exports, such as india and turkey, have also experienced extreme fluctuations in their currencies.
It is unlikely to help that weaker currencies should improve the international competitiveness of these countries and that more favorable commodity and oil prices should challenge profit margins and domestic consumption, or that economic reforms in india and mexico seem to be starting to have a positive impact. Because if the international financial markets do indeed go back into panic mode, positive effects will probably be completely irrelevant and the "hot money" the emerging markets are being abandoned in an indiscriminate and hasty manner – with the usual consequences for them and the rest of the world.