BIS points to ‘powerful contagion risk’ from QE tapering for emerging markets far worse than the Asian Financial Crisis
The BIS highlights a ‘massive expansion’ of dollar borrowing in global bond markets by emerging market banks and companies, and that leaves them vulnerable to rises in interest rates and depreciating local currencies. Another recent study suggests Chinese dollar borrowings exceed $1.1 trillion.
‘The deeper integration of emerging market economies into global debt markets has made emerging market bond markets much more sensitive to bond market developments in the advanced economies,’ noted the BIS paper. ‘The global long-term interest rate now matters much more for the monetary policy choice facing emerging market economies than a decade ago.’
The BIS concluded that money printing by the Fed had kept emerging market borrowing costs 250 basis points lower than historic averages until the first hint of an end to QE last May. This is completely at odds with the Federal Reserve’s insistance that its monetary policy changes have a marginal impact on emerging markets. In fact they are in the front line.
The BIS report adds that dollar debt issuance has been so great in the emerging markets that they are at risk of a ’sudden stop’. That was happened in Dubai in 2009 when the global financial crisis derailed the local property boom. Hundreds of thousands of workers were sent home as building and infrastructure projects stalled.