admin
Emerging markets are already in a crisis situation and rising interest rates together with weakening currencies could push more governments into default, Deutsche Bank has said in a report.
The sources of risk for low and middle-income countries include the withdrawal of fiscal stimulus in advanced economies and the depreciation of their currencies against the dollar as US and euro region yields rise, which could lead to higher costs of servicing external debt.
“It is reasonable to say that a crisis has already arrived,” the analysts led by chief economist Michael Spencer wrote in the report. “While most of the stress so far has been in frontier markets, the pressure has been broad-based and felt in both offshore and local currency markets.”
The US Federal Reserve and European Central Bank are expected to increase rates for another six months. At worst, local borrowing costs will reach “the highest levels in many years just as weaker currencies make servicing debts prohibitively expensive,” the analysts wrote.
The distress could spread from frontier markets to other asset classes that dominate investors’ portfolios, they said. The highest debt burden levels are in Asian emerging markets and Latin American countries which have, on average, less external resilience than their counterparts. On top of Sri Lanka, another 14 countries have seen their access to international credit “virtually shut off,” according to the report. — Bloomberg.
Online Reporter