Back in September, the IMF issued a generic warning about EM corporate debt. The organization had estimated that total borrowing had exploded, from about $4 trillion in 2004 to $18 trillion in 2014; and perhaps even more than that. Concerns over such bloat typically focus offshore, and not without good reason. However, that understates the true degree of risk since even EM debt held onshore in whichever country is still exposed to external financing factors. In other words, domestic EM debt markets are just as susceptible to euro/dollar decay as offshore holdings.
That leaves EM’s with two distinct financing issues: the first as direct in the form of what everyone calls “hot money†but is really the mood of the global “dollar shortâ€; the second is the plumbing onshore within EM markets often provided by euro/dollar banking (though, it should be pointed out, not strictly via euro/dollars; euro/euros, euro/yen, etc., are all a part of the network of funding commitments that have supported the massive rise in debt). From an internal EM perspective, the implications are straightforward – credit crunch. Looking instead outside to the ether of 21st century global wholesale finance, the questions have no easy answers even though they are the same that have been asked over and over since 2007.
We have already found evidence both direct and indirect for the first. EM’s as a whole are struggling and likely as a result of dramatically scaling back in especially “dollarâ€-based financing. More straightforward, in February the BIS estimated that dollar credit to EM nations had fallen for the first time since the Global Financial Crisis (as they call it) in 2009. Such a result is far from surprising given the financial mess experienced especially since the middle of last year. “Global turmoil†is much more than a convenient FOMC escape clause. I wrote in February:
Such warning [the IMF in September] was perhaps a bit too late, as China and Brazil in particular have already suffered just those kinds of “runs.†What we need to explore, somehow, is the manner in which they form and propagate outside of local EM terms. In other words, “breakdown in markets†is not limited to currency “flight†but rather, as I think we have seen much of already, total monetary withdrawal – systemic euro/dollar declines. In fact, I think it evident by currency (including the yen; Japanese banks supplying euro/dollar resources to Chinese corporates and financials) and by wholesale dynamics we have already seen all of that, meaning what we are really after is how far it could really run.
