from Follow the Money

Highly recommended: Joanna Chung on disappearing developing country debt

February 11, 2007

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I usually talk about the growth of the foreign exchange reserves of key emerging economies, but another feature of the past few years has been the fall in their external sovereign debt.   Joanna Chung of the FT not only has the story, but covers it extremely well.

I completely agree with one of the more controversial points she makes.  After the crises at the late 1990s (and 01-02 in Turkey and Latin America) the government of emerging economies decided that borrowing abroad, usually in foreign currency, wasn’t worth the risk.    Issuing a bond governed by New York was once seen a real achievement, a sign of new found financial strength.   Not any more.  

The governments of emerging economies are not borrowing -- at least not in foreign markets -- even through the money is there for the taking.   At rather attractive rates too. Chung:  

The reluctance to accumulate foreign debt also appears tied to a change in attitude toward global capital markets, which just a few years ago were seen as the quick route to jump starting economic growth.   ….   [the succession of financial crises from 1982 on] have taught steadily taught developing countries that a reliance on volatile world capital market is has serious consequences.   When the world economy is strong and liquidity is plentiful, bankers and bond investors alike have been happy to lend money to developing country governments.  But when times have turned tough and when governments have really needed the money, the markets have denied them access to finance.”

The US, as we all know, has no such concerns about its reliance on global capital markets.  It borrows in its own currency, which certainly helps.  But it also has never encountered a time when it needed money and the market wasn’t there …. 

Then again, the US doesn’t really rely on private capital markets.  The US has a much bigger official lifeline than the IMF ever provided emerging economies (and I don’t here the Wall Street Journal railing against the resulting moral hazard).  The world’s central banks – the key ones -- have been willing to finance the US when private markets aren’t willing to do so.  Without any conditions, political or economic.

At least so far.

Incidentally, I thought it was interesting that total emerging market debt – expressed as a share of GDP – peaked in 2003 (See the FT's chart).   External debt was heading down, but domestic debt was rising (thank Brazil and Turkey …  ).    The trend didn’t look particularly good.  The IMF was worried.   And, well, Dr. Roubini and I were worried too.  We wrote a book about responding to financial crises in emerging economies.   We had the good sense to focus on the vulnerabilities created by domestic liability dollarization and domestic debt, not just external bonds.   But we did, well, assume that their would still be crises.

Our timing could hardly have been worse.   There haven't been any crises since then.  Debt levels have done nothing but fall.   Unless something changes, and fast, it looks more likely to serve as a history of how the emerging market crises of 1995-2003 were handled than as a guide for how to handle future crises.


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