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.