Fund says governments in emerging markets should prepare now for a new credit crunch because of a 10-year corporate borrowing binge
Rising global interest rates could prompt a new credit crunch in emerging markets, as businesses that have ridden the wave of cheap money to load up on debt are pushed into crisis, the International Monetary Fund has warned.
The debts of non-financial firms in emerging market economies quadrupled, from $4tn (£2.6tn) in 2004 to well over $18tn in 2014, according to the IMF’s twice-yearly Global Financial Stability Report.
With the US Federal Reserve expected to raise interest rates in the coming months, the IMF warns that emerging market governments should ready themselves for an increase in corporate failures, as firms struggle to meet sharply higher borrowing costs.
That could create distress among the local banks who have bought much of this new debt, causing them in turn to rein in lending, in a “vicious cycle” reminiscent of the credit crisis of 2008-09.
“Shocks to the corporate sector could quickly spill over to the financial sector and generate a vicious cycle as banks curtail lending. Decreased loan supply would then lower aggregate demand and collateral values, further reducing access to finance and thereby economic activity, and in turn, increasing losses to the financial sector,” the IMF warns.
“Emerging markets must prepare for the adverse domestic stability implications of global financial tightening,” the IMF says.
Its analysis underscores the backlash that the Federal Reserve could face if it starts to tighten policy and unleashes chaos in emerging economies.
Janet Yellen, the Fed’s chair, made clear that its recent decision to delay a long-planned increase in rates was a result of the turmoil in emerging markets, in particular China. The IMF has called on the Fed to delay policy “lift-off”, because of the potential impact on other economies.
Full article: IMF warns of new financial crisis if interest rates rise (The Guardian)