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Capital Markets

Emerging market debt: Punishing original sin

Emerging-market corporate debt – the fastest-growing asset class in the world – faces its first stress test, thanks to a surging dollar and rising US yields. As developing countries square up to another possible debt crisis, an increasingly inevitable round of corporate defaults threatens to swamp an illiquid market.

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For the emerging-market debt community, it’s back to the future. Fears over the debt-servicing capacity of Chinese property firms, Ukrainian corporates and Latin American oil producers are rocking the asset class. 

A perfect storm – a relentless surge in the dollar as well as the death of both the commodity super-cycle and US monetary stimulus on steroids – threatens the health of EM economies. Defaults are staging an uptick as the spectre of a cost-of-capital crisis for large swathes of the emerging market private sector looms. The key question is whether emerging markets face a systemic crisis, or whether corporate defaults on external bonds can be contained.

The backdrop is foreboding. The emerging market bond equivalent of ‘original sin’ – excessive dollar liabilities serviced with depreciating local-currency revenues – has returned with a vengeance. Leading emerging market currencies have plummeted by 20% to 40% against the dollar in recent months. 

In turn, the cost of servicing dollar liabilities has jumped. New issue volumes for Ceemea are at post-crisis lows, despite the global yield famine. The majority of external bond deals launched in 2014 are trading below their new issue price.


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