Global Deflation Alert: Hidden EM Debts To China Could Be Immense

Tyler Durden's picture

Authored by Carmen Reinhart, originally posted at Project Syndicate,

As central bankers and finance ministers from around the globe gather for the International Monetary Fund’s annual meetings here in Peru, the emerging world is rife with symptoms of increasing economic vulnerability. Gone are the days when IMF meetings were monopolized by the problems of the advanced economies struggling to recover from the 2008 financial crisis. Now, the discussion has shifted back toward emerging economies, which face the risk of financial crises of their own.

While no two financial crises are identical, all tend to share some telltale symptoms: a significant slowdown in economic growth and exports, the unwinding of asset-price booms, growing current-account and fiscal deficits, rising leverage, and a reduction or outright reversal in capital inflows. To varying degrees, emerging economies are now exhibiting all of them.

The turning point came in 2013, when the expectation of rising interest rates in the United States and falling global commodity prices brought an end to a multi-year capital-inflow bonanza that had been supporting emerging economies’ growth. China’s recent slowdown, by fueling turbulence in global capital markets and weakening commodity prices further, has exacerbated the downturn throughout the emerging world.

These challenges, while difficult to address, are at least discernible. But emerging economies may also be experiencing another common symptom of an impending crisis, one that is much tougher to detect and measure: hidden debts.

Sometimes connected with graft, hidden debts do not usually appear on balance sheets or in standard databases. Their features morph from one crisis to the next, as do the players involved in their creation. As a result, they often go undetected, until it is too late.

Indeed, it was not until after the eruption of the 1994-1995 peso crisis that the world learned that Mexico’s private banks had taken on a significant amount of currency risk through off-balance-sheet borrowing (derivatives). Likewise, before the 1997 Asian financial crisis, the IMF and financial markets were unaware that Thailand’s central-bank reserves had been nearly depleted (the $33 billion total that was reported did not account for commitments in forward contracts, which left net reserves of only about $1 billion). And, until Greece’s crisis in 2010, the country’s fiscal deficits and debt burden were thought to be much smaller than they were, thanks to the use of financial derivatives and creative accounting by the Greek government.

So the great question today is where emerging-economy debts are hiding. And, unfortunately, there are severe obstacles to exposing them – beginning with the opaqueness of China’s financial transactions with other emerging economies over the past decade.

During its domestic infrastructure boom, China financed major projects – often connected to mining, energy, and infrastructure – in other emerging economies. Given that the lending was denominated primarily in US dollars, it is subject to currency risk, adding another dimension of vulnerability to emerging-economy balance sheets.

But the extent of that lending is largely unknown, because much of it came from development banks in China that are not included in the data collected by the Bank for International Settlements (the primary global source for such information). And, because the loans were rarely issued as securities in international capital markets, it is not included in, say, World Bank databases, either.

Even where data exist, the figures must be interpreted with care. For example, data collected on a project-by-project basis by the Global Economic Governance Initiative and the Inter-American Dialog could provide some insight into Chinese lending to several Latin American economies. For example, it seems that, from 2009 to 2014, total Chinese lending to Venezuela amounted to 18% of the country’s annual GDP, and Ecuador received Chinese loans exceeding 10% of its GDP. Chinese lending to Brazil was closer to 1% of GDP, while lending to Mexico was comparatively trivial.

But actual disbursements may have fallen short of the original plans, meaning that these countries’ debts to China are lower than estimated. Alternatively – and more likely – the data may not include some projects, lenders, or borrowers, meaning that the debts could be much higher.

Moreover, other forms of borrowing – such as trade finance, which is skewed toward shorter maturities – are not included in these figures. Currency-swap agreements, which have been important for Brazil and Argentina, must also be added to the list. (This highlights the importance of tracking net, rather than gross, reserves.)

In short, though emerging economies’ debts seem largely moderate by historic standards, it seems likely that they are being underestimated, perhaps by a large margin. If so, the magnitude of the ongoing reversal in capital flows that emerging economies are experiencing may be larger than is generally believed – potentially large enough to trigger a crisis. In this context, keeping track of opaque and evolving financial linkages is more important than ever.

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laomei's picture

What a bunch of dipshits.  

Macchendra's picture

Debt slavery is like water wings:  deflation is the first step to putting people underwater.

El Viejo's picture

No Matter the politics everyone wants a debt slave now.  Is everyone making money off money?  Doesn't anyone make money the old fashioned way anymore?  Where is real value added these days? 

Nenad's picture
Nenad (not verified) El Viejo Oct 12, 2015 12:52 PM

Obama will not finish his second term! Current Events Linked to Ancient Biblical Prophecy!

Tinky's picture

This is not about when the next crisis will occur, but when a critical mass will recognize that it is occurring right now.

Therefore, TPTB are not attempting to avert a crisis, but rather to prevent the true, rotten state of the system from being revealed for as long as possible.

And time's running out.

yogibear's picture

This round-robin game of currency devaluing is boring.  

When is someone going to blow up?

Greece keeps getting bailed out (groundhog day) by the EU.

Now the EU is being flooded by middle eastern  refugees. So more welfare.

Japan keeps getting worse. 

Looks like the US will do negative rates and more QE (called something else maybe).

Taking a lot longer then anyone can predict.

centerline's picture

Amazing, isn't it.  I figure if the bottom really drops out of any country, the people in said country will go ape shit.  And since most modern countries are tied together one way or another (including counterparty exposure), we all go to our knees together.  Then something breaks...  hard to say when or where though. 

kevinearick's picture

Risk & Reward

Timing, when the curve crosses the line, will take care of itself, if you maintain the correct distance from the ‘we are all socialists now’ communists, to see the opportunity, on the line. Yes, the communists erect barriers to you as an individual to favor the Borg participants, subsidies which grow like a virus, but that is no reason to break the rules; employ them, against themselves, with a negative feedback loop to position yourself.

The corporation chooses to perceive the middle class as labor to be swapped in and out, along with the associated fixed costs of the latter’s infrastructure, only to build an ever-bigger bad bank called government, for their ultimate incarceration, a digital Nazi prison camp in this iteration. When you follow the rules into the black hole, what remains of your individual character triggers a systematic response signal. Whether that signal turns into a positive feedback threat, or negative feedback skill development opportunity, depends upon you.

The moment you follow the herd into a portfolio of hedges, you are playing last man standing in a Ponzi built for the purpose. There’s nothing wrong with being a communist, but you want to enter and rise with the Ponzi as quickly as possible, so the layers imploding beneath you don’t catch up, until they do, hopefully on your death bed.

You have 100 people, 95 of which hedge their bets. How do you suppose they view the 5 who don’t, who are building wealth? You have 100 people, 50 of which hedge their bets. How long before 95 hedge their bets? Your only real choice is whether you invest in your children, a bridge of faith across that generation gap, or communism, always a bridge to nowhere, using the gap as a means of extortion. Of course the pensions are all in, and lose to inflation every time.

I just left an old guy, who had cars, farms, blah, blah, blah, looking for someone to save him from his loneliness, but all he could do is talk, like an expert, about Mark Twain’s last minute conversion. Then I turn the corner and run into a kid, just coming off detox, ‘high on life,’ not knowing that he is just begging for a different kind of drug - blah, blah, blah, something for free, blah, blah, blah, something for free …

Whether the bridge gets built is always up to you, to recognize what is needed before it is needed, in time to build it, beyond the empire. Funny, when you look death in the face, how all those false assumptions underpinning all those plans melt away. God may have a plan for you, but he isn’t going to tell someone else. Whether three points make a line or not depends upon perception.

In the old days, we called it level-headed.


kevinearick's picture

'The only limit on profits is then how much you can borrow. Greed drives returns.'

Personality Disorder's picture

I don't build bridges, I burn them. Four points make a tetrahedron, a new dimention.

Urban Redneck's picture

Let's not forget the current off balance sheet financing fad of governments worldwide - the Public-Private-Partnership (PPP) aka off balance sheet revenue bond. 

847328_3527's picture

There's gonna be a lot moar printing going on I suspect.

tarabel's picture



No figures for Cuba on that LatAm list?

And what about all the Chinese "partners" in Africa, along the bribe-riddled New Silk Road corridor, elsewhere in Asia, over in the Land of Chess Not Checkers, as well as the other economic boat anchors in the BRICS?

The financial life of a society relies on the idea of getting paid by the people who owe you money. This all adds up to not getting paid at a time when everyone else expects you to pay them.

The news is not good anywhere, and it all tells the same story of looming breakdown.