Tags: Irwin | dollar | emerging | markets

NYT's Irwin: Dollar's Surge Wreaks Havoc in Emerging Markets

By    |   Wednesday, 18 March 2015 08:00 AM EDT

Much attention has been paid to the soaring dollar's damaging effects on U.S. exports — by making them more expensive in foreign currency terms — and on corporate earnings — by lessening the value of companies' foreign revenue when converted into dollars.
 
But emerging markets are suffering from the dollar's strength too, thanks to their huge debt burdens denominated in greenbacks. The dollar's jump to multi-year highs in recent weeks means the debtors have to pay more of their own currency to acquire the dollars to repay their debt.
 
"The soaring value of the American dollar is rippling across the globe. As it rises, it is threatening emerging economies where companies have taken on trillions' worth of dollar­based debt in recent years," writes New York Times columnist Neil Irwin.
 
A total $9.2 trillion of dollar loans were outstanding overseas as of last September, up 50 percent from 2009, according to the Bank for International Settlements.
 
"Now that the dollar has strengthened and rates are on the rise, it presents a risk and a challenge to many emerging markets in that their debts have become more onerous, more burdensome," Hung Tran, an executive managing director at the Institute of International Finance, an association of global banks, tells Irwin. "The challenge for authorities in emerging market countries is to understand to what degree their corporate sector is naked or exposed."
 
When it comes to overall global debt, it grew by $57 trillion from 2007 through the second quarter of 2014, raising the global debt-to-GDP ratio by 17 percentage points to 286 percent, according to the McKinsey Global Institute.
 
The endgame of this global cesspool won't be pretty, says Jeremy Warner, assistant editor of The Daily Telegraph. "The world is sinking under a sea of debt, private as well as public, and it is increasingly hard to see how this might end, except in some form of mass default," he writes.
 
It won't just be sovereign nations, but the corporate sector as well, Warner says.
 
"You might have thought that a financial crisis as serious as that of the past seven years would have ended the world economy's addiction to debt once and for all. It has not. If anything, the position has grown even worse since the collapse of Lehman Brothers [in 2008]."
 
Governments in advanced economies have borrowed heavily to fund bailouts and boost demand. Private sector debt also has climbed rapidly in many countries.
 
The massive debt burden makes the global economy very vulnerable to financial crises, Warner maintains. "How might the present explosion in debt end? The only thing that can be said with certainty is 'badly.'"

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Much attention has been paid to the soaring dollar's damaging effects on U.S. exports — by making them more expensive in foreign currency terms — and on corporate earnings — by lessening the value of companies' foreign revenue when converted into dollars.
Irwin, dollar, emerging, markets
437
2015-00-18
Wednesday, 18 March 2015 08:00 AM
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