EM rally makes a mockery of debt relief calls, for now
The US Federal Reserve’s whatever-it-takes approach to stabilising markets has had an unintended victim: serious discussions about debt relief in the emerging markets.
As eye-wateringly high EM debt burdens are exacerbated by the economic effects of Covid-19, several high profile economists are frantically penning jointly-authored articles warning of an unprecedented debt crisis.
Coordinated debt relief is urgently needed, they say, and not just for the poorest countries that have signed up to the G20’s payment standstill. Middle income countries are likely to face tough choices about debt payments in the medium term.
Yet rational ponderings from renowned academics about debt sustainability dynamics in emerging nations are powerless against yield hungry bond investors.
As they are called upon to join in the debt relief initiatives, private investors are not merely dragging their heels. Driven by low rates across the globe amid massive developed market QE, fund managers are defiantly ploughing billions of dollars into EM government bond markets. Even single-B rated sovereigns have ripped tighter.
For now, many EM countries are grateful beneficiaries of the Fed’s bond buying; they are clinching vital funding at close to pre-crisis costs.
While that sort of pricing is achievable, warnings about the need for debt relief to help countries emerge from the crisis will fall on deaf ears.
This could end in one of three ways: a resurgence in EM growth on the back of cheap and easy financing, proving these economists to be alarmists; an ugly wave of restructuring including countries who today have ample market access; or — catastrophically — a muddling on.
Depressed rates will mean EMs governments continue to scrape together funds to meet budgets, but at the expense of investment in the real economy, and ultimately development indices in the world’s poorest countries.
Today, global liquidity is a saviour for many emerging nations. But it risks laying the path for a prolonged downfall if it means grave fundamental issues are not addressed.