With the tightening of Fed policy, non-US dollar currencies depreciated sharply, short-term hot money flowed out and asset prices plummeted. The external financing environment of some fragile economies is tightening, and the pressure of foreign debt repayment is increasing, which leads to the debt crisis "Enemy at the Gates".
Incentives: Fed raises interest rates to accelerate capital return.
The Federal Reserve has sharply raised interest rates and tightened global liquidity, and capital is accelerating to return to the United States from overseas markets. According to the data of International Finance Association (IIF), in July, emerging markets suffered the outflow of portfolio capital for the fifth consecutive month, setting a record for the longest net outflow time since 2005.
Yu Shao, chief economist and assistant to the president of orient securities, said that under the background of higher US bond yields and stronger US dollar index, the attractiveness of emerging market assets has weakened, and spreads have promoted international capital outflows.
Capital outflows have also exacerbated the depreciation of local currencies in emerging market countries. The expectation of a sharp interest rate hike by the Federal Reserve remains at a high level, pushing the US dollar index to continue to climb. Up to now, it has broken through 1 14, setting a 20-year high. The dollar soared and non-dollar currencies "harvested". Since the beginning of this year, the exchange rates of many currencies against the US dollar, including the euro, the pound, the Japanese yen and the Sri Lankan rupee, have all hit decades-low levels.
The continuous tightening of dollar liquidity has also increased the interest burden of dollar debt in emerging economies and developing countries, and the external financing environment has deteriorated. As the global bond yield curve moves up, the cost of repaying dollar debt in developing economies is also rising. Yu Shao said that the rising interest rate on debt leads to the decline of debt sustainability. Under the transmission of the debt chain, the risk of global debt default has increased, and the debt crisis is devouring the economic prospects of emerging markets.
For emerging economies, raising interest rates by the Federal Reserve will also limit the scope of their monetary policy, making it impossible to maintain the independence of monetary policy. Since the beginning of this year, in order to curb high imported inflation, boost the foreign exchange market, and prevent capital outflows, many emerging economies have been forced to follow the Federal Reserve in raising interest rates substantially, and the rate of interest rate hikes has hit record highs. Luo Zhiheng, chief economist and dean of the research institute of Yuekai Securities, believes that the forced tightening of currencies in emerging markets may lead to a slowdown in their economic growth.
Reality: The debt burden is getting heavier and heavier, and the solvency is declining.
The peak of debt repayment in emerging market countries is coming, and the debt crisis is sounding the alarm. "Due to the long-term implementation of negative interest rate policies by central banks such as the Federal Reserve, global government and private debts have risen rapidly, and dollar debts of some economies have accumulated." Zhou, a macro researcher in the financial market department of China Everbright Bank, said that with the tightening of policies by the Federal Reserve, the external financing environment of some fragile economies has been tightened, and the pressure on foreign debt repayment has increased.
According to IIF data, the global debt in 20021year was $303 trillion. In the Global Debt Monitoring Report in September this year, IIF said that the ratio of global debt to GDP rose slightly after four consecutive quarters of decline, and it is estimated that by the end of 2022, the ratio of global debt to GDP will reach 352%.
The strength of the US dollar not only increases the pressure on emerging market countries to repay their foreign debts, but also "corrodes" their own solvency-many countries are consuming foreign exchange reserves to maintain exchange rate stability due to the serious depreciation of non-US currencies. But in the long run, it will also lead to a further decline in foreign exchange reserves, increase the pressure of currency depreciation and fall into a vicious circle.
In addition, after the Fed raised interest rates, demand slowed down and global trade shrank. International commodity prices denominated in US dollars soared, and the trade deficit of non-energy and food exporters widened. Under the dual effects of reduced export demand and increased import costs, the balance of payments of emerging market countries has deteriorated, which has also led to a decline in their solvency.
Experience: Emerging markets are "affected" by the Fed's interest rate hike.
From the perspective of prolonging the time, the repeated interest rate hike cycles in the history of the Federal Reserve have brought many hidden dangers to fragile emerging market economies.
In the 1970s, in response to domestic inflation, then Federal Reserve Chairman Volcker sharply raised the federal funds rate, which led to the debt crisis of Latin American countries and experienced a "lost decade". 1994, the federal reserve once again entered the cycle of raising interest rates, which is also considered to be one of the factors that led to the outbreak of the Asian financial crisis in 1997.
Since the international financial crisis in 2008, due to the negative interest rate policy maintained by many central banks, the global government and private debts have risen rapidly, and the dollar debts of some economies have snowballed.
In the face of the whirlpool of the Fed's interest rate hike, some economies may not escape a bumpy fate. "It can be expected that some economies with single and unbalanced economic structure, trade financing' twin deficits' and high dependence on external financing will be more vulnerable to the Fed's austerity policy." Zhou said to him.
In April this year, Lebanon declared its central bank and central government bankrupt; In July this year, Sri Lanka also declared bankruptcy because of "insolvency". In the undercurrent of the debt crisis, Lebanon and Sri Lanka may just be the first economies to collapse.
The World Bank warned that with the tightening of the financial environment and the appreciation of the US dollar, 25% of emerging markets are in or close to debt distress, and more than 60% of low-income countries are facing debt distress.
In order to prevent the debt crisis from repeating the same mistakes, countries are also actively helping themselves. Argentina, on the verge of sovereign debt crisis, reached a debt refinancing plan of about $44.5 billion with the IMF. According to the agreement, Argentina promised to reduce the fiscal deficit to 2.5% of GDP this year, and gradually to 1.9% and 0.9% by 2023 and 2024 respectively.
"But the IMF's prescription for these countries to solve the debt crisis is very bitter." Yu Shao believes that although emerging markets can strengthen capital controls in a short period of time, catch up with the pace of the Federal Reserve by raising interest rates, and reduce their exposure to foreign debt through a certain degree of austerity, I am afraid that economic shocks will be inevitable and financial markets will fluctuate violently.