Heed warnings about potential debt crisis in emerging markets

Those who warn of coming debt crises are often accused of "crying wolf" - until the wolf arrives and wreaks havoc in the chicken coop. This has happened many times in recent years, so it's as well to listen to some of the warnings that are being sounded now.

The latest comes from Haruhiko Kuroda who, as governor of the Bank of Japan, speaks with authority on such matters. He warned this week of "deteriorating debt dynamics" in emerging markets, especially among non-financial firms, and how this endangers countries and corporate sectors. Mr Kuroda (who as a former president of the Asian Development Bank can also lay claim to a sound knowledge of developing as well as advanced economies) drew parallels between the current situation and that prevailing at the time of the Latin American debt crisis in the early 1980s. What concerns him, and also an increasing number of other officials and economists, is the fact that a high proportion of emerging market debt (not least in Asia) is denominated in dollars or other foreign currencies - and that translates into potential for trouble ahead.

When we speak of "debt dynamics", it is not just in reference to the prospect of rising interest rates on dollar-denominated or other foreign currency borrowing, as Hung Tran, executive managing director of the Institute of International Finance (IIF), has pointed out. Rising rates - as is the case with the dollar and may ensue soon in the case of the euro - do of course make debt servicing more costly, and if you are up to your eyes in debt (as many non-financial firms in parts of Asia are now) that is not good news. But another factor is by pursuing quantitative easing (QE) policies, the US Federal Reserve and other central banks have bought huge amounts of corporate bonds along with other financial securities. As they "taper" such purchases, emerging market bonds will suffer.