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Is emerging market debt the third leg of the global financial crisis? Maybe

It is too soon to sound the 'all clear' on the debt situation in emerging markets right now, says Capital Economics.

Emerging market debt is not at a level that could trigger a market crash, but it’s “too soon” to sound the all clear, says Capital Economics.

The concept that emerging market debt could be the next leg from the global financial crisis has been floating around for a few years now. Proponents see emerging market debt because the third domino to fall after the meltdown within the U.S. sub-prime mortgage market in 2008 and also the European sovereign debt crisis in 2011-2012 that saw a near-collapse of the eurozone.

The debt levels of some emerging market countries for example China happen to be rapidly rising previously decade. Fuelled by low interest rates, many of these countries have borrowed in U.S. dollars, further creating concern as the greenback’s improvement in the past year has increased debt loads.

“These risks should not be dismissed lightly,” said Julian Jessop, chief global economist at Capital Economics.

Jessop notes that top debts can be managed in emerging market countries right now because, despite slowing growth in places for example China, emerging economies continue to register stronger economic growth than the developed world. Central banks within the emerging world also have more policy ammunition, as few have undertaken the kind of easing measures developed market central banks have.

So far, Jessop said that only a few emerging market countries face “significant risks,” not enough to trigger another global financial crisis. But he also notes that his firm’s studies have shown the rate of change of debt can be more essential than the level in determining of debt.

“It is simply too soon to sound the ‘all clear’,” he explained.

Financial Post

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