miércoles, 16 de septiembre de 2015

miércoles, septiembre 16, 2015

Fitch warns of emerging market shock if Fed sticks to rate plan

Investors do not believe the US Federal Reserve will dare to take away the punch bowl. They may be in for a nasty surprise if it does

By Ambrose Evans-Pritchard

A share trader takes a phone call as he is seen behind a false one dollar bill at the German stock exchange in Frankfurt
Emerging markets went into a tailspin last year at the first suggestion of Fed bond tapering Photo: Reuters
 
 
Emerging markets have accumulated $7.5 trillion of external debt and are acutely vulnerable to a rapid rise in US interest rates, regardless of whether they borrowed in dollars or their own currencies, Fitch Ratings has warned.
 
The credit agency said international markets are pricing in a much slower pace of US monetary tightening than the US Federal Reserve itself, risking a potential financial upset in East Asia, Latin America and Africa if Fed hawks refuse to bow to market pressure over the next two years.
 
Fitch said the Fed has signalled a rise in rates to 3.8pc beyond 2017 but investors simply refuse to believe that this will happen, with futures contracts implying rates of just 1.4pc over the same span – an unprecedented gap of 240 basis points, and one that is fraught with risk.
 

The warning comes as the Fed decides this week whether to raise rates for the first time in nine years, despite worries about China and the sharp sell-off in global equities in August, or whether to delay yet again until the dust settles. Traders say the likelihood that the Fed will pull the trigger on Thursday has fallen to 28pc.
 
Andrew Colquhoun, Fitch’s senior director, said the pace of Fed tightening has powerful implications for emerging markets, which levered their economies to the hilt during the era of excess liquidity from Fed largesse and zero rates. “An outcome closer to the Fed’s own guidance would be a shock,” he said.

External debt in these in these countries has increased by $2.8 trillion to $7.5 trillion since the Lehman crisis. The most extreme rise has been in Latin America, where gross external debt has jumped by 118pc.



The Fed ignored evidence of mounting stress in emerging Asia and Russia in 1998, continuing to talk tough into the teeth of the storm, insisting that it would set monetary policy purely in the interests of the US.

This proved to be a mistake. The bank was forced to slash rates three times in emergency moves after its insouciance triggered a full-blown crisis in the East Asia and set off systemic contagion across the world that quickly reached the US itself.

William Dudley, the head of the New York Fed, said in April that the US authorities are highly sensitive to knock-on conditions in emerging markets, knowing that any misjudgment could come back and bite the US itself.



The Fed has recruited Stanley Fischer as vice-chairman because of his veteran experience with global market forces, both as former governor of the Bank of Israel and an-ex official at the International Monetary Fund.

But it is still not clear how much the bank will bend to prevent collateral damage in emerging markets. Loans are growing at a fast clip of 7.8pc. The broad M2 money supply is growing at a 6.2pc pace, and narrow M1 at 8.4pc, data that would normally imply a buoyant economy six to 12 months ahead. Some monetarists have already begun to warn that the Fed is badly behind the curve.

Mohamed El-Erian, from Allianz, said it is likely to be the “loosest tightening in history” but that is not the historical pattern of Fed behaviour. Leading governors are loathe to give the impression that they are being pushed around by markets, and they may conclude that quantitative easing by the Bank of Japan and the European Central Bank is enough to keep global finance supplied with liquidity.

Oddly, at the latest G20 meeting the central bank governors of Mexico and India called for the Fed to lance the boil immediately. “I found that very peculiar. There is no inflationary pressure and no reason at all to raise rates now,” said one official who attended the event.

Unlike the emerging markets borrowing sprees of the 1970s or early 1990s, private companies are this time responsible for most of the debt. Yet sovereign states have also been raising funds abroad at a brisk pace, issuing $1 trillion of external debt since the Lehman crisis. Half is in dollars or other foreign currencies.

Fitch said many of these countries have fat reserves and a range of external assets, but the sheer quantity of debt still leaves them vulnerable to a rate shock. Each rise of 50 basis points in US interest rates historically leads to a 16-point rise in yields on the JP Morgan Emerging Markets Bond Index.

A new study by the Bank for International Settlements found an even bigger knock-on effect, with an average move of 43 points in emerging markets for every 100-point move in US rates.

The BIS said developing economies risk a double squeeze if the Fed tightens hard and pushes the dollar higher. The currency burden of their debts would rise, and the ratchet effect of higher interest rates would tighten the monetary noose.

While countries can dip into reserves to stop their currencies falling, this automatically entails monetary tightening and makes any credit crunch even worse. As China is discovering, huge reserves cannot easily be deployed in recessionary conditions. They are a Maginot Line.

The BIS said the Federal Reserve must move with great care, if only in its own “enlightened self-interest”.

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