The BIS’ Callous Calming Effect
The Bank for International Settlements’ latest quarterly review cited “uneasy calm” in advance of the US Federal Reserve’s first post-crisis rate increase, as cross-border lending dipped through the first half and emerging economies had only $1.5 billion in net bond issuance in Q3, the lowest since the 2008-09 emergency. Advanced market credit was down $900 billion in Q2, exacerbated by dollar and euro currency weakness, while China claims rose just $40 billion but contracted on an annual basis. India and Indonesia lines also fell, as did Brazil and Mexico. Total Chinese exposure was off $100 billion to $1.2 trillion as of end-June, with the short-term under one year portion at $750 billion. Emerging Europe activity slipped $3.5 billion, and Mideast-Africa lending improved by double that amount. Net global bond flows decreased $50 billion in Q3, with the developing market pace through September at $140 billion “significantly slower” than last year due to commodity debt and growth concerns, according to the update. All major markets including Korea and Turkey were shuttered, with the latter’s financial firms posting the worst volume since the crisis.
A separate chapter examines overall non-bank dollar debt accumulation at almost $10 trillion, with one-third incurred by resident borrowers, and external bonds through affiliates not captured in the data. Uses can vary from trade and FDI finance to asset hedging and speculation, and statistics are unavailable for off-balance sheet transactions such as forwards and show the company location but not nationality. The research finds that a dozen countries represent 70 percent of the total, with Chile and the Philippines in the table as smaller bases. Dollar bank loans exceed bonds in China, India, Russia and Turkey, with most from resident banks. In Q3 China mainland foreign currency borrowing shrank $70 billion, joining the Hong Kong and broader foreign retrenchment to mark an “inflection point.” Systems in Indonesia and Russia are also heavily dollarized drawing on domestic deposits, while Turkey sources dollars from wholesale facilities abroad as well as at home. Bonds outstanding were $1.1 trillion for the group as of id-year, and in the non-bank general category government issues were the majority only in the Philippines and Turkey. Brazil is just behind China in offshore corporate bonds at $110 billion, while Russian firms tend both to tap banking and fixed-income markets overseas. Korea imposed a “macro-prudential levy” on dollar-denominated credit in 2010, and Russia’s recent local shift has been due notably to post-Crimea takeover sanctions. Indian regulators have again eased caps on corporate cross-border bonds, and the section suggests that as dollar costs rise the window there and throughout the core universe could narrow with market and policy responses.
However on a related topic the BIS uncovered no justification for the argument of ratings agency bias against the developing world as it dissected trends and methodologies since the crisis, with industrial countries from Europe in particular absorbing the downgrade brunt. Split decisions with different agency marks are common among the major and less-known international providers, and volatility is higher in CDS spreads and proxies like the Institutional Investor sovereign rankings. Assessment goes beyond simple debt burden to encompass a range of performance and policy factors so that any presumed emerging market discrimination is overcome by affirmative action, the paper comments.
