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Fed Triggers Bank Flight From Emerging Markets: Mark Whitehouse
Aspire, Investments | 06 May 2015

As the Federal Reserve gradually ends its extraordinary efforts to stimulate the U.S. economy, there is increasing concern about the potential for repercussions in faraway places – particularly in emerging markets. To judge from the recent behavior of global banks, those repercussions are already happening.

Since the 2008 financial crisis, emerging markets have been on a credit binge, fueled by extremely low U.S. interest rates that sent lenders looking farther afield for better returns. Over the six years through September 2014, private credit to the non-financial sectors of major developing countries almost tripled, to $4.3 trillion, according to the Bank for International Settlements.

Now the winds are shifting. The Fed is moving toward raising rates, and developing-nation borrowers appear less able to handle all their debt, a large chunk of which is denominated in increasingly expensive dollars (the U.S. currency’s trade- weighted exchange rate has risen 13 percent since mid-2014). Hence the worry: Might investors start pulling money out, exacerbating the debt problem and possibly triggering a larger crisis?

Actually, they already are taking money out. According to new estimates from the BIS, the outstanding stock of cross- border lending into developing nations decreased by about $80 billion in the last three months of 2014 — the largest quarterly withdrawal in more than five years. Here’s how that looks:

The outflow from China, at $51 billion, was the largest in nominal terms, followed by Russia, with $19 billion. Measured as a share of gross domestic product, cross-border lending declined the most in Malaysia, followed by Angola (among developing economies with at least $100 million in 2014 GDP).

To be sure, the banks’ moves aren’t necessarily the beginning of a destabilizing exodus. The changing outlook for interest rates, which makes the U.S. more attractive, justifies a shift in lending flows in any case. What happens next will depend on how deftly the Fed does its job, how well emerging- market borrowers handle their debt burdens, how skittish or overextended global investors prove to be — and, perhaps, how ably regulators can identify and mitigate the risk of contagion.

To contact the author on this story:
Mark Whitehouse at

To contact the editor on this story:
Max Berley at

Mark Whitehouse writes editorials on global economics and finance. He was previously at the Wall Street Journal, where he covered economics in New York and served as a deputy bureau chief in London.

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