Zhitong Finance APP has learned that nearly $250 billion in bad debt is becoming a threat to drag emerging markets into a historic wave of defaults.
Under heavy pressure from food and fuel costs, Sri Lanka was the first country this year to stop paying its foreign debt and reluctantly declared a debt default in May. Recently, the Prime Minister of Sri Lanka officially declared that the country is bankrupt. The country's foreign exchange reserves have plummeted to a record low, and the US dollars used to pay for basic imported goods including food, medicine and fuel have been exhausted.
Today, attention to debt defaults has shifted to El Salvador , Ghana, Egypt , Tunisia and Pakistan and other emerging market countries that are considered to be prone to debt defaults. Currently, the cost of insuring debt defaults in emerging markets has soared to the highest level since the Russia-Ukraine conflict. World Bank Chief Economist Carmen Reinhart expressed concern about this, saying: "For low-income countries, debt risks and debt crises are not hypothetical. Things are already close to happening." Data compiled by
media shows that sovereign The number of emerging market countries with non-performing debt has more than doubled in the past six months to 19. The yields on these sovereign debts suggest that investors believe a default is a real possibility. These 19 countries have a combined population of more than 900 million, and some countries, such as Sri Lanka and Lebanon, have already defaulted on their debts. So at risk are foreign holders of $237 billion in sovereign bonds. Data show that this figure accounts for 17% of the US$1.4 trillion in outstanding external debt of emerging market sovereign countries.
The current emerging market debt crisis is reminiscent of the Latin American debt crisis of the 1980s. Market participants said that the current situation has certain similarities. Just like at that time, the Federal Reserve suddenly accelerated its interest rate hikes to curb inflation, causing the dollar to appreciate sharply, while emerging market countries struggled to repay their foreign debts. Today, some emerging market countries with unsound external balance sheets and foreign exchange reserves are facing the greatest pressure. These emerging market countries struggling to repay their foreign debt may also face political turmoil and social instability due to soaring food and energy prices.
A quarter of the countries tracked by the Bloomberg Emerging Markets U.S. Dollar Composite Sovereign Index are in trouble, with government bond yields in these countries more than 10 percentage points higher than U.S. bond yields of similar maturities. The index has fallen nearly 20% this year, exceeding the full-year decline during the 2008 global financial crisis.
T. Samy Muaddi, a portfolio manager at Rowe Price, bluntly said that this is "arguably one of the worst sell-offs faced by emerging market bonds in history." Caesar Maasry, head of cross-asset strategy for emerging markets at Goldman Sachs Group Inc. "Things could get worse."
Foreign fund managers are pulling out of emerging markets. Data from the Institute of International Finance showed $4 billion flowed out of emerging market bonds and stocks in June, the fourth consecutive month of outflows, as the impact of the Russia-Ukraine conflict on commodities and inflation hit investor sentiment. .
The ever-expanding bond interest rate is also a particular concern for the presidents of major central banks. Policymakers are finding the trade-off between tightening monetary policy to protect the currency and curb inflation and keeping it loose to help get the fragile economic recovery on track after the epidemic increasingly clear. Multilateral institutions such as the International Monetary Fund have also warned that real conflicts related to soaring living costs may intensify further, especially in countries where governments are unable to provide support to affected households.
Sri Lanka is just one of them. Barclays analyst Christian Keller warned that similar situations may occur in other countries in the second half of this year, and "populations suffering from high food prices and supply shortages may become a powder keg of political unrest."
