Scrambling for debt

May 25, 2010

Developing countries must be eyeing with alarm the vast amounts of bonds that the euro zone and the United States are planning to sell this year and for years to come. Having borrowed large sums, starting a couple of years back to fund the bailout of  U.S. and European banks, developed economies must now raise the cash to repay the holders of those old bonds  — in market parlance, they need to roll over the debt.

The prospect of rolling such vast sums continuously in the current fragile market must be unnerving to say the least. But what about other countries who too have creditors to pay off — emerging markets in particular?  How will their deals fare if  U.S. and European bonds, seen usually as safer assets,  flood the market and drive up yields?

Not too badly, it would seem. The first reason is a simple matter of numbers. The United States needs to roll over one-fifth of all  its outstanding bills in 2010, — a whopping $1.6 trillion. The euro zone must find 1.3 trillion euros in the coming year — more than the recent Greek aid deal that took them so much time and hand-wringing to finalise.   Emerging markets’ needs are tiny in comparison.  ING Bank reckons they need as little as $75 billion to service their hard currency debt in 2010 and half of this has already been raised.  Should not be a problem, then.

The second reason is  more interesting: western governments are in this mess because in their rush to place cash cheaply most of the bonds they issued were short-dated, meaning they carry maturities of 2 years or less.  That is risky because short-term debt is more likely to fall victim to market turmoil.

So to compare: About a third of the euro zone’s outstanding bonds mature within two years and 20 percent expire in 12 months. The average maturity of the U.S. Treasury bill is just over four years. But average maturity on emerging hard currency bonds listed on the JP Morgan EMBI plus index is about 12 years.

Because emerging markets were the ones who burned in past debt rollover crises (remember Russia in 1998?) they have tried to cut down on short-term debt — even relatively weak credits like Turkey and Egypt have issued 30-year bonds. Pierre-Yves Bareau, who manages $8 billion in emerging debt at JP Morgan Asset Management says developing countries havent been “caught this time in the debt rollover cycle”.

But he warns emerging markets are not out of the woods completely — if rollover risks in the developed world get too bad, investors burned elsewhere might just choose to take their cash and flee.

Fund managers have been enthusiastic this year about emerging market bonds, putting a record $10 billion into the sector just in the first three months of 2010. But if they decide to stop buying, emerging economies’ debt rollover plans too could be in trouble and that’s especially so for places like Hungary or Turkey which have relatively large amounts of dollar debt coming due.

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It is really scary what is happening out there. Didn’t the economists and other experts see this scenario coming? If so, why didn’t they warn these countries the danger of the insurmountable debt they are accumulating? These countries must know that sooner than later, they will have to pay off the debt they are incurring.

Evelyn Guzman

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