Global financial advisors have warned that the growing strength of the US dollar poses a threat to the stability of emerging economies. The Bank for International Settlements (BIS), often referred to as the central bankers' bank, has warned that fragility in financial markets could have an acute impact on the global economy, especially in emerging economies like India and China.
These warnings came after China revealed some very disappointing trade figures last Monday. Further, the dollar rose to a seven-year high against the yen and a five-year high against the Bloomberg Dollar Spot Index, a mixed basket of 10 currencies.
Claudio Borio, monetary and economic department head of the BIS, said that the continued rise of dollar would expose funding and currency mismatches and aggravate debt burdens. He further went on to state that it would be imprudent to ignore that markets did not fully stabilize themselves. This was in reference to some reassuring statements from central banks that it was possible to maintain ultra-low interest rates and bond-buying programs aimed at giving economic confidence a much, needed boost.
BIS identifies economic turbulence
Switzerland-based BIS also revealed that issuance of collateralized debt obligations has surpassed levels recorded before the 2007 economic crisis. Flurry in the leveraged loans market, a form of Collateralized Debit Obligation, ran at $250bn (£161bn) in the quarter for the year ending September 2014, compared with an average of $190bn from 2005-2007.
Data published in the most recent BIS quarterly review analyzed the recent series of stock market fluctuations. The last flash crash was on October 15, where stock markets plunged in value and movements in US treasury bonds were more severe than the day Lehman Brothers collapsed at the beginning of the Great Recession.
Amidst this scenario, BIS is concerned that some emerging economies could come undone due to a growing dependence on loans taken out in US dollars. Offshore lending in US dollars hit the $9 trillion mark, roughly double its 2008 value. Emerging economies have taken out approximately $3.1 trillion in cross-border loans, predominantly in US dollars. Since the end of 2012 alone, dollar loans to China have doubled to $1.1 trillion. Chinese citizens have borrowed more than $360 billion in debt securities.
Possible dollar value impact
This current state puts borrowing economies in an extremely vulnerable spot. When the dollar appreciates in value against local currencies, loans becomes more expensive to repay, raising the risk of default and furthering economic instability. The dollar has been steadily rising against the euro and the yen since the US Federal Reserve announced an end to stimulus programs and has hinted at a rise in interest rates next year. In contrast, the European Central Bank and Bank of Japan have relaxed monetary policies that would signal greater stimulus.
China and India are not the only ones who need to worry though. With America now over $18 trillion in debt, America is spending itself into oblivion.