A recent blog post in the New York Times highlights the effects of a surging dollar in ‘emerging economies’. The article points out that many foreign economies include companies that hold significant amounts of dollar-based debt, making future predictions more pessimistic as the dollar increases in value. These companies were enticed to purchase debt in U.S. currency because of the appealing low-interest, which made it more appealing than loans in their respective country’s currency. Between 2009 and 2014, the level of dollar loans outside of the U.S. increased fifty percent.
The Reserve Bank of India’s Governor described this phenomenon as playing Russian roulette – companies may come out of the process unscathed and save a few dollars, but they still run the risk of owing more than what they originally planned. This risk is all the more apparent when a company is domestic in scope; the company brings in local currency, and as the dollar appreciates, it takes more of it to repay loans. This means that in the future, we are likely to observe an upsurge in companies that render themselves bankrupt. Evidence of this is already visible: a string of Brazilian sugar producers have filed for bankruptcy; India’s leading electricity company is being forced to sell of segments of its infrastructure in order to avoid default; a Chinese real estate company is threatening to pay 2.4 cents on the dollar to its creditors.
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This is one of the criticisms of US Monetary policy on behalf of the Fed: that pushing monetary policy so far while already at the zero lower bound through programs such as quantitative easing produces international spillover effects.
First (to Oliver) why should the Fed put the residents of other countries ahead of residents of the US?
For Keifer, this cross-currency lending is exactly what brought down the Thai economy on July 2, 1997. It likely was a factor in Argentina as well, there are several students on campus who have lived through problems there and can provide first-hand accounts of what happened to their families and neighbors.
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