Friday, June 28, 2019

One Of The Most Dangerous Situations In Finance: Dollar Denominated Emerging Market Corporate Debt

Over the years we've harped on the risks of borrowing in a currency other than the one in which you earn your income.
The quintessence were the Polish homeowners enticed by ultra-low interest rates who took out Swiss franc denominated mortgages which they paid by earning in zloty, converting to CHF and sending in the payments. When the franc appreciated it took more and more zloty to buy the francs, to the point in some situations the homeowners owed more on the mortgages than their monthly income.

When I saw this headline yesterday "Reaching for yield: the reshaping of the EM corporate debt market" my first though was "Yeah, reaching for yield can come back to bite you".
But when I read the first few paragraphs:
The massive universe of negative-yielding bonds hit a new milestone earlier this month. On the backs of central banks around the world tilting dovish, the value of this debt surged higher to an eye-watering $12.5tn — a level not seen since 2016.

Risk assets have simultaneously rallied, accelerating a well-known dynamic that has come to characterise the post-financial crisis decade: the reach for yield.

It is this phenomenon that's helped to turbocharge both the US junk bond market and the leveraged loan market, helping them to become $1tn asset classes stateside, according to S&P Global. This phenomenon can also take credit for the growing popularity of illiquid assets and Japanese investors increasing their holdings of unhedged foreign bonds, despite the risks should FX rates move against them.

A new paper by Columbia University's Charles Calomiris, and a team of academics, traces how this hunger for yield has helped to propel the growth of another asset class: emerging market (EM) corporate debt. More specifically, dollar-denominated bonds issued by EM corporates with a face value of $500m or more....
 the reaction changed to "Holy crap, these are going to get creamed, how do we get some shorts on?"
The story is from FT Alphaville and continues HERE

Previously on borrowing in a foreign currency:
Our Dec. 2014 post: Evans-Pritchard: "Dollar surge endangers global debt edifice, warns BIS":
Two quick points*:
1) This is the second BIS warning in under six months.
2) It is very dangerous to borrow in a currency other than the one in which you earn your income.
True at retail, true at wholesale....
Reprised in "'Russian ruble's fall: A classic 'currency collapse'" and Why It's Such a Big Deal".
Borrow In Dollars, Pay In Tears 
We've said ad nauseum*
Remember When the BIS Was Warning That A Strong Dollar Would Wreck Everything?

In Which Izabella Also Comments On Russia and Foreign Liabilities
We beat her to it, I think. Our post "Russian ruble's fall: A classic 'currency collapse'" and Why It's Such a Big Deal" was timestamped at 11:56 am PST while hers is 20:07 GMT. 11 minutes ahead.
Great minds and all that....

And some of our January 2015 posts on the plight of the Polish home buyers:

Poland To Help Holders Of Swiss Franc Denominated Mortgages
Speaking of borrowing in a currency other than the one you earn your income in.*
"The Swiss franc appreciation and the sorry saga of FX lending"
Polish Swiss-Franc Mortgages May Sink Austrian Bank