The emerging-market debt crises of the recent past could not only happen again today; they could happen on a much larger scale than in the past. Taking advantage of ultra-low interest rates in the advanced countries, emerging-market banks and firms have been borrowing like never before.
The Communist Party of China would like the mainland Chinese population and the rest of the world to believe that the ongoing, sometimes violent protests in Hong Kong pose a threat of "terrorism." But the truth is that China has only itself to blame for pushing the city's idealistic youth into the streets once again.
Failed states used to be largely the preserve of the developing world, where the institutions of democracy do not have deep roots. But given the extent to which the Brexit campaign has undermined Britain's institutions through lies, it is reasonable to worry that the country will soon come to resemble a tinpot dictatorship.
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SANTIAGO – Consider the following scenario, one that has played out time and again in emerging-market countries. Local banks and firms go on a borrowing binge and pile up dollar-denominated debt – debt that pundits consider perfectly sustainable, as long as the local currency is strong. Suddenly, something (an increase in United States interest rates, a drop in commodity prices, a domestic political conflict) causes the local currency to drop in value against the dollar. The debt burden, measured in domestic currency, is now much higher. Some borrowers miss interest payments; others are unable to roll over principal. Financial mayhem ensues.
This is how the Latin American debt crisis of the 1980s, the Mexican Tequila crisis of 1994, the Asian debt crisis of 1997, and the Russian crisis of 1998 unfolded. It was also how the financial crisis of 2008-2009 transmitted itself to emerging markets. Every time, borrowers and lenders claimed to have learned their lesson.
Not only could it happen again today; it could happen on a much larger scale than in the past. Taking advantage of ultra-low interest rates in advanced countries, emerging-market banks and firms have been borrowing like never before. A recent paper by the Bank of International Settlements shows that since the global financial crisis, outstanding dollar credit to non-bank borrowers outside the US has risen by half, from $6 trillion to $9 trillion.
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