OCT 9, 2015
8
Carmen
Reinhart
Carmen
Reinhart is Professor of the International Financial System at Harvard University's
Kennedy School of Government.
LIMA – As
central bankers and finance ministers from around the globe gather for the
International Monetary Fund’s annual meetings here in Peru, the emerging world
is rife with symptoms of increasing economic vulnerability. Gone are the days
when IMF meetings were monopolized by the problems of the advanced economies
struggling to recover from the 2008 financial crisis. Now, the discussion has
shifted back toward emerging economies, which face the risk of financial crises
of their own.
While no
two financial crises are identical, all tend to share some telltale symptoms: a
significant slowdown in economic growth and exports, the unwinding of
asset-price booms, growing current-account and fiscal deficits, rising
leverage, and a reduction or outright reversal in capital inflows. To varying
degrees, emerging economies are now exhibiting all of them.
The turning
point came in 2013, when the expectation of rising interest rates in the United
States and falling global commodity prices brought an end to a multi-year
capital-inflow bonanza that had been supporting emerging economies’ growth.
China’s recent slowdown, by fueling turbulence in global capital markets and
weakening commodity prices further, has exacerbated the downturn throughout the
emerging world.
These
challenges, while difficult to address, are at least discernible. But emerging
economies may also be experiencing another common symptom of an impending
crisis, one that is much tougher to detect and measure: hidden debts.
Sometimes
connected with graft, hidden debts do not usually appear on balance sheets or
in standard databases. Their features morph from one crisis to the next, as do
the players involved in their creation. As a result, they often go undetected,
until it is too late.
Indeed, it
was not until after the eruption of the 1994-1995 peso crisis that the world
learned that Mexico’s private banks had taken on a significant amount of
currency risk through off-balance-sheet borrowing (derivatives). Likewise,
before the 1997 Asian financial crisis, the IMF and financial markets were
unaware that Thailand’s central-bank reserves had been nearly depleted (the $33
billion total that was reported did not account for commitments in forward
contracts, which left net reserves of only about $1 billion). And, until
Greece’s crisis in 2010, the country’s fiscal deficits and debt burden were
thought to be much smaller than they were, thanks to the use of financial
derivatives and creative accounting by the Greek government.
So the
great question today is where emerging-economy debts are hiding. And,
unfortunately, there are severe obstacles to exposing them – beginning with the
opaqueness of China’s financial transactions with other emerging economies over
the past decade.
During its
domestic infrastructure boom, China financed major projects – often connected
to mining, energy, and infrastructure – in other emerging economies. Given that
the lending was denominated primarily in US dollars, it is subject to currency
risk, adding another dimension of vulnerability to emerging-economy balance sheets.
But the
extent of that lending is largely unknown, because much of it came from
development banks in China that are not included in the data collected by the
Bank for International Settlements (the primary global source for such
information). And, because the loans were rarely issued as securities in
international capital markets, it is not included in, say, World Bank
databases, either.
Even where
data exist, the figures must be interpreted with care. For example, data
collected on a project-by-project basis by the Global Economic Governance
Initiative and the Inter-American Dialog could provide some insight into
Chinese lending to several Latin American economies. For example, it seems
that, from 2009 to 2014, total Chinese lending to Venezuela amounted to 18% of
the country’s annual GDP, and Ecuador received Chinese loans exceeding 10% of
its GDP. Chinese lending to Brazil was closer to 1% of GDP, while lending to
Mexico was comparatively trivial.
But actual
disbursements may have fallen short of the original plans, meaning that these
countries’ debts to China are lower than estimated. Alternatively – and more
likely – the data may not include some projects, lenders, or borrowers, meaning
that the debts could be much higher.
Moreover,
other forms of borrowing – such as trade finance, which is skewed toward
shorter maturities – are not included in these figures. Currency-swap
agreements, which have been important for Brazil and Argentina, must also be
added to the list. (This highlights the importance of tracking net, rather than
gross, reserves.)
In short,
though emerging economies’ debts seem largely moderate by historic standards,
it seems likely that they are being underestimated, perhaps by a large margin.
If so, the magnitude of the ongoing reversal in capital flows that emerging
economies are experiencing may be larger than is generally believed –
potentially large enough to trigger a crisis. In this context, keeping track of
opaque and evolving financial linkages is more important than ever.
Read more
at
https://www.project-syndicate.org/commentary/hidden-debt-burden-emerging-markets-by-carmen-reinhart-2015-10#FXJpvBLv1lmqBq1A.99
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