London — Even if the pandemic-related debt explosion can be managed by the world’s biggest economies, last week’s bond market ruckus put large swathes of the developing world on notice yet again.
Countries with already heavy debt burdens also had, unlike the major economies, limited ability to simply print their own currencies to fund those debts for fear of exchange rate crises stoking inflation and foreign investor strikes. US banks JPMorgan and Morgan Stanley and others rushed to warn about a hit to emerging currencies akin to 2013’s “taper tantrum” in Treasuries, which preceded a slowing in Federal Reserve bond buying back then. It was an event from which many emerging markets have never fully recovered as tighter dollar credit was quickly followed by US-China trade wars and long-term doubts about globalisation at large.
Unlike the rebound from the global banking crash 12 years ago, rising real borrowing rates will likely hit emerging market debtors hard after a decade of falling potential growth and ebbing globalisation. As Jen points out, central bank bond buying in the eurozone and Japan has cut the amount of those government bonds open to investors and led to the share of US Treasuries of available reserve currency government bonds to almost double to 63% over 20 years.
Potential growth in emerging markets peaked in 2012 and has been falling since, they estimate, while slowing population growth and a technology-driven death of the business ‘outsourcing’ trend would likely erode it further in the years ahead.
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