Emerging-market bond default rates may be set to lift off
By Sujata Rao
LONDON, March 3 (Reuters) - A decade-long period of rock-bottom default rates on emerging- market debt looks to be coming to an end.
All the factors that fed a boom in overseas borrowing -- fast economic growth, a weak dollar, booming commodity prices, and low U.S. interest rates -- appear to be changing. And if the past is any indication, the $3 trillion emerging-market debt sector could be headed for trouble.
Historically, debt default in emerging markets has gone lock-step with episodes of dollar strength: the late 1990s, the Argentine, Turkish and Brazilian crises of 2001-2002 and the 2008 credit crunch are examples, shown in this graphic:
Emerging-market default rates stood at 0.76 percent at the end of 2014, a seven-year low and the fifth-lowest rate since 1981, according to calculations by Standard & Poor's that were cited by Standard Chartered in a recent note.
But with the dollar up 20 percent in the past year against a basket of currencies, the sector may be edging toward another era of troubles.
"You have cycles when emerging markets move in bunches, such as in the 1990s when defaults happened in a group, then things improved, and now again we are in a phase when the trend is weakening and there is more focus on defaults," said Costa Vayenas, the head of EM investment at UBS Wealth Management.
Any upcoming debt crisis will differ from previous cycles. With possible exceptions such as Ukraine and Venezuela, it is likely that defaults will centre on companies rather than governments. Continuación...