IMF warns emerging market companies have overborrowed $3 trillion
By Mitra Taj
LIMA Oct 7 (Reuters) - Emerging market companies have an estimated $3 trillion in overextended loans that threaten to trigger a sharp credit crunch and capital outflows in economies that have already been hit hard by low commodity prices, the International Monetary Fund said on Wednesday.
The IMF warned that a messy withdrawal of stimulus measures in advanced economies could start a "vicious cycle of fire sales, redemptions, and more volatility." The U.S. Federal Reserve has said it is on track to raise rates for the first time in almost a decade by the end of this year.
Overborrowing in emerging market economies likely adds up to an average of 15 percent of their gross domestic product, and 25 percent of China's GDP, the IMF said.
Emerging markets where companies tapped easy credit to soften the impacts of the global financial crisis are now on the verge of a credit downturn, the IMF said. Many of the borrowers are state-owned enterprises and the lenders are often local banks.
"Corporate and bank balance sheets are currently stretched," it said in its Global Financial Stability Report. "Immediate prudential attention is needed."
China's exposure to credit risks as it transitions to a more market-based economy is especially worrisome, the Fund said.
China's August stock market crash and sudden devaluation in August rattled global markets.
"Direct financial spillovers include a possibly adverse impact on the asset quality of at least $800 billion of cross-border bank exposures," the Fund said. Continuación...