This might be one of those times, as instability in the Middle East, Europe, and parts of Latin America sends worried capital pouring into the US, pushing the dollar up from its recent lows:
This may not look like much of a spike in the historical scheme of things, but it actually is, because a handful of developing countries have, for reasons that defy both history and common sense, decided to borrow trillions of US dollars. Now, with the dollar appreciating versus their local currencies, they’re having trouble making the suddenly-much-more-expensive interest payments.
Why would a country whose money is the peso or the real conclude that it’s a good idea to bet that their currency will appreciate versus those of other countries for decades to come? Who knows? But they’ve done it, and big banks around the world have enabled them.
Here’s a chart from Bloomberg showing that the foreign currency debt of emerging market countries has nearly tripled since 2008, to more than $8 trillion (most of which is denominated in dollars, with some euros tossed in for diversification), which they now have to pay back regardless of where the dollar goes relative to the currency in which their governments collect taxes or their corporations make sales.
And here’s an excerpt from the Bloomberg article that included the above chart:
Emerging-market companies and governments straining to deal with the rising cost of borrowing in dollars face increasing pressure as a record slew of bonds come due.
Some $249 billion needs to be repaid or refinanced through next year, according to data compiled by Bloomberg. That’s a legacy of a decade-long debt binge during which emerging markets more than doubled their borrowing in dollars, ignoring the many lessons of history from the 1980s Latin American debt crisis, the 1990s Asian financial crisis and the 2000s Argentine default.
Why should Americans care if Turkey or Argentina defaults on their bonds? Because institutions all over the world bought those bonds in more innocent times (see Here’s When Everyone Should Have Known That Argentina Would Implode), and have built share prices, pension payouts and arbitrage strategies around them. If the bonds blow up, so do a lot of banks, hedge funds and pension funds.
And if the resulting global anxiety sends even more flight capital into the dollar – pushing its exchange rate up even further and making emerging market debts even harder to manage – we might be looking at a negative feedback look with systemic implications.
The iShares MSCI Emerging Markets Indx ETF (EEM) fell $0.92 (-1.98%) in premarket trading Tuesday. Year-to-date, EEM has declined -1.46%, versus a 1.98% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of DollarCollapse.com.