Emerging Markets Face a New Problem as Trillions in Bonds Mature – and Soon
The U.S. dollar continues being the single most important factor for the Emerging Markets.
And as the dollar keeps getting stronger – it will continue crippling them.
“But isn’t a strong dollar supposed to be better for Emerging Markets by making their exports cheaper?”
Yes – and no.
True, a stronger dollar does make foreign currencies cheaper – which can boost their exports.
But the problem today is that Emerging Markets are bogged down with massive amounts of dollar-denominated debts. And the weaker their currencies are – the harder it is to repay those debts.
That’s very important to keep in mind – especially as trillions of dollar-denominated bonds mature over the next few years.
Let’s take a closer look. . .
Since 2009 – Emerging Market governments and corporations have gorged on cheap dollar debt.
How?
Because when the Federal Reserve cut interest rates to zero and launched three rounds of money printing (via Quantitative Easing) in attempt to save the global financial system post-2008 – two critical things ended up happening.
First – U.S. investors were starved for yield. Meaning they couldn’t make enough interest from government bonds to meet their future obligations. So they started lending abroad to foreign countries that offered higher rates of interest (although much riskier).
And even though some of these borrowers didn’t deserve such favorable rates (like Turkey and Argentina and Greece) – lenders still gave them what they wanted.
And Second – the Emerging Market governments and corporations saw this as an opportunity to get cheaper dollar financing. They could now get dollar loans at lower rates of interest than what was available locally.
Here’s an example of a ‘free money’ tactic Emerging Markets would do with their cheaper U.S. debt. . .
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