I.M.F. Sees Debt Risks in Emerging Markets

By Landon Thomas JR. | International New York Times, April 11, 2014 | Go to article overview

I.M.F. Sees Debt Risks in Emerging Markets


Landon Thomas JR., International New York Times


A credit bubble in fast-growing economies could burst, a report said, putting American mutual funds and other global investors in danger.

As fears mount about emerging markets, American mutual fund investors with significant exposure to bonds issued by indebted companies in fast-growing economies may be at risk, the International Monetary Fund have warned in a report.

Bonds issued by big companies in Brazil, China, Russia and Turkey have seen explosive growth in recent years after central banks around the globe started making extraordinarily large purchases of government and corporate bonds. Given rock-bottom interest rates in the developed world, investors flocked to such high-yielding debt, long seen as the riskiest slice of the emerging-market asset pie.

In the Global Financial and Stability Report published on Wednesday, I.M.F. economists highlighted the trouble spots on the financial horizon, noting the potential for growth to slow and interest rates to rise. As that happens, they estimated that problematic corporate loans could increase by as much as $750 billion and many companies may be pushed into default. That situation would hurt global investors, particularly mutual funds in the United States.

The fund echoed concerns voiced by American regulators. As both have noted, asset-management companies like Fidelity and Pimco, which bought these securities in favorable financial conditions, may have trouble selling them when interest rates begin to rise.

"This problem goes beyond corporate bonds and includes the broader increase of credit relative to G.D.P. in many emerging markets," said Hung Q. Tran, a top executive at the Institute of International Finance, which this week plans to issue its own report scrutinizing debt in emerging markets. "Countries have to put in place policies to address this if they want to avoid a bursting of the bubble."

Fund companies have been quick to tap into the market. Since 2008, assets in retail-oriented mutual funds that invest in emerging- market bonds have ballooned to $76 billion, from $12 billion, according to Thomson Reuters.

At the outset, borrowers were generally corporations that either were backed by governments or received the bulk of their revenue in dollars -- the energy giants Petrobras in Brazil and Pemex in Mexico, for example. …

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