Ten years have passed since the 2008 subprime mortgage crisis. It was the worst financial panic since the Great Depression. Now it seems that some of the lessons learned back then are being forgotten. Growing debt burdens in emerging markets are igniting new fears of a crisis that could shake economies everywhere.
This time the debt is not mortgages or deficit spending. The new crisis involves corporate debt and bonds.
What is setting off alarms is the recent collapse of the Turkish lira that has lost more than forty percent of its value. Turkish banks and companies borrowed heavily over the past few years to finance infrastructure projects and even a mammoth cruise ship terminal. The lira’s collapse makes it hard to repay loans or bonds made in dollars and euros.
Turkey is not alone in its dollar or euro-delineated debt burden. Similar loans or corporate bonds can be found in Brazil, South Africa, Argentina, Russia and other nations. They have taken advantage of cheap money to bolster their national economies and build infrastructure. Investors have likewise shifted their money to these markets ignoring risks and creating a massive bubble.
As a result of such policies, the McKinsey Global Institute reports that total world debt load is an incredible $169 trillion as compared to $97 trillion in 2007. This burden amounts to nearly 2 1/2 times the size of the total global economy.
Perhaps it is in the frantic nature of modern finance and economy. There is the great tendency to detach investment from firms that produce things. Too many investors look for the short-term profit instead of waiting for the often greater long-term yield. They frenetically look for any higher return on investment especially in times of low interest.
Throughout it all, there is the frenetic intemperance of transactions where the desire is to have everything now, instantly and effortlessly.
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Sooner or later, the bills come due. Borrowers scramble to pay. Speculative investors then rush to unload failing stocks and start the cycle again by looking for new bargains.
The foreign crisis could not have come at a worse time. A strong dollar, rising interest rates and weaker local currencies come together for a perfect storm.
In these emerging countries, the strong dollar and sinking local currencies combo make it difficult and expensive to repay loans. The panic also sends capital out of the countries and triggers inflation at precisely the time when loans are coming due. Default or refinancing is looming on the horizon for many companies.
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Global economies tend to globalize problems. Any crisis rarely stays local these days. Failing economies reduce a nation’s ability to import now-more expensive goods from the U.S. and Europe. Many banks, especially Spanish ones, extended loans to Turkey and will be impacted by its collapsing economy.
Many argue that the corporate debt in emerging markets will not lead to a deep recession like that of 2008. Nevertheless, the situation is causing unease. The world is very different today. Other factors of instability can enter into the equation and cause significant damage to the global economy. Europe and the United States depend upon the emerging markets, which stimulate growth needed to keep their economies prosperous. Plunging exports to these countries will have a negative impact on the stock market.
The foreign corporate debt burden comes at a time when American corporate debt is also at an all-time high. Over the last ten years, quantitative easing (QE) programs increased the money supply and pumped trillions of dollars in liquidity into global markets. American corporations responded by splurging on bond offerings.
Many attribute the booming stock market to the increased use of low-interest bonds to arrange buybacks, mergers and increased dividends. Such artificial measures increase share value but do not encourage long-term expansion and investments.
The tightening of monetary conditions and rising interest rates are likely to burst America’s corporate debt bubble. It threatens to add to economic woes since U.S. corporate debt is now over 45% of GDP.
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Virtue has a great role to play in the economy. One great lesson to be relearned from this new financial crisis center is the need for restraint. A sound economy is based upon measured and calculated risks. Investors need to be concerned about the long-term health of the markets. Central bank money meddling is no substitute for wise and prudent business practices. The present generation should not burden later generations with their mistakes.
All these things need to be relearned the hard way. However, the worst part is that the errors are not solved, but only accumulate. Over everything, there is the towering and growing figure of $169 trillion in debt. It weighs heavily upon the world.
As seen on American Thinker.