Low Rate Debt’s Bungled Bonanza
The IMF’s global financial system survey for the spring meetings cited reduced risk as the Cyprus rescue’s bail-in implications had yet to percolate, as European weakness was again in the forefront with a focus on high corporate leverage especially in the periphery. Among industrial countries Japanese banks’ rapid overseas loan buildup and US pension funds’ reach for yield were flagged. Foreign exposure for Tokyo’s big three is now at 20 percent of the portfolio and alternative investments are 25 percent of historically conservative public plans in a so-called “gamble for resurrection” to match long-term assets and liabilities. Emerging markets have enjoyed a low-rate “bonanza” in the current environment but too much money may be pouring in, the study cautions. Corporate and sovereign bond supply has not yet risen to compensate for the post-2010 drop in syndicated lending, and combined with flat equity issuance has raised company leverage ratios in Brazil, Chile, China and Thailand. In the last five years business foreign currency borrowing was up 50 percent, and it has doubled in the speculative real-estate sector the past year. Asian and Latin American debt-equity levels are 200-300 percent in some cases and one-tenth hard currency-denominated. Chinese companies already face industrial overcapacity, lower profitability and property curbs as all forms of debt finance may be 175 percent of GDP. “Indiscriminate” international demand may have brought policy “complacency” in places like Hungary and Ukraine as spreads have narrowed 400 basis points since 2008 due almost entirely to monetary stimulus and anti-crisis initiatives abroad. With a reversion to standard volatility foreigners could dump 20 percent of bond holdings widening yields 100 basis points. Inflows have supported double-digit annual credit growth in Asia and Latin America with credit-GDP now half the advanced economy average at 70 percent. Household and mortgage versions have spiked in all regions. Asian authorities have imposed macro-prudential limits and supervisors elsewhere should be wary of consumer and corporate buildups, the Fund advised.
As the update was released recriminations continued over the hurried Cyprus operation which will now require the government to sell gold reserves for its contribution share as the EU extends 10 billion euros. The European parliament criticized the Commission for “appalling communication” while monetary affairs head Rehn admitted to dashed hopes for more gradual adjustment and lack of clarity over secured deposits in the exercise. Lawmakers also questioned the absence of any reference to future negotiations with Turkey over the island’s unification. It has diversified exports to the Gulf but still relies on a “global liquidity glut” to cover the chronic current account deficit and maintain 15 percent domestic credit expansion, according to rater S&P. FDI offsets less than one-fifth the gap and one-third of that total went into real estate in 2012, and external financing needs remain above the historic average despite the bond boom, the agency finds.
As the update was released recriminations continued over the hurried Cyprus operation which will now require the government to sell gold reserves for its contribution share as the EU extends 10 billion euros. The European parliament criticized the Commission for “appalling communication” while monetary affairs head Rehn admitted to dashed hopes for more gradual adjustment and lack of clarity over secured deposits in the exercise. Lawmakers also questioned the absence of any reference to future negotiations with Turkey over the island’s unification. It has diversified exports to the Gulf but still relies on a “global liquidity glut” to cover the chronic current account deficit and maintain 15 percent domestic credit expansion, according to rater S&P. FDI offsets less than one-fifth the gap and one-third of that total went into real estate in 2012, and external financing needs remain above the historic average despite the bond boom, the agency finds.
