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Emerging Market Debt Crunch Looms...

publication date: Feb 4, 2009
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I warned of the bubble in emerging market economies and assets last Summer, but it seems that investors are still complacent regarding the risks of ongoing contagion from the credit crisis leading to widespread default. Just this week we have seen Kazakhstan devalue its currency by 18% and Russian sovereign debt downgraded by Fitch to BBB with a negative outlook. Unless markets (and commodity prices) improve fast, Russia could well run out of reserves within two years. As shown in the charts below, the country has $60bn of foreign debt maturing in 2009 alone, amid a slump in the Ruble. I noted last August in Russian Roulette, that the hubris being shown by the Putin regime politically and Russian oligarchs financially was a classic prelude to a major reversal.
Taiwan, Mexico (which is on the verge of anarchy, see Mexico: Running out of Oil and Options), Korea and Turkey all face huge external refinancing demands this year. Among smaller nations, Dubai has run up large external debts to recreate itself as a kitsch tourist playground and looks likely to need a bailout from its neighbours. Debt falling due is one way of looking at sovereign debt risk, but another is to look at the foreign liabilities/wholesale funding needs of the domestic banking system. On this basis, the Baltic states, Iceland, Colombia, the Ukraine and Kazakhstan all look extremely vulnerable. And who is most exposed to a domino default scenario in emerging market debt? European banks who carry over $500bn of exposure on their books, and by implication the Euro.


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