Are Emerging Markets in Danger?

12/15/2014 12:01 am EST


Jim Jubak

Founder and Editor,

For several months MoneyShow's Jim Jubak has been warning how the strong dollar could hurt the EM economies and now the Bank for International Settlements is also worried.

For the last couple of Money Shows; London and Toronto at the beginning of November, I've been talking about how the strong dollar poses a huge danger to emerging market economies, emerging market markets and emerging market currencies. Well, the Bank of International Settlements, BIS, has just jumped on board the Jim Jubak band wagon and said yes indeed, we're seeing a huge huge problem building up in these markets because of the strong dollar and what the Bank of International Settlements pointed to was a big increase in borrowing by emerging market companies and a big increase in across board lending from the international banks to emerging markets.

The problem with all of this is that you're seeing a two or three trillion dollar set of lending loans, of which many are denominated in dollars and that creates a problem because as the dollar appreciates against your local currency it means you may be selling refrigerators in San Paulo and getting Real for them, but you've got to repay your loan in dollars and the dollar is getting more expensive, so it puts a lot of stress on corporate balance sheets. You're seeing a lot of countries that don't have huge reserves; Russia and Nigeria are the two that sort of look like they've got problems right now.

You're seeing a big draw down as they try to support their local currencies and all of this is creating a fair amount of tension in the currency markets and in the debt markets and what is really interesting is that the Bank of International Settlements pointed to the volatility that we're starting to see in the treasury market. The treasury market is huge. It is like 12/13 trillion dollars. We shouldn't see a whole lot of volatility in this market. It is not how it normally plays out, but what we saw in October was a big volatility day on the 15th that statisticians say is the kind of volatility you get every 1.6 billion years, so big event and you're starting to see some strange movements in that market that suggest that maybe liquidity is not all that it should be, that market makers have gone away because of changes in the regulatory system.

What the Bank of International Settlements and yours truly are pointing to is saying hey the risks in the international markets right now are rising as the dollar goes up and a rise in the dollar is good for U.S. investors and it is good for the average person in the U.S. who has to pay less in dollars for things they might want to buy that are made elsewhere, but it does indeed increase the dangers in the global financial system.

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