A couple of weeks ago Borio Claudio (Claudio Borio) advised investors to pay attention to the threat posed by currency mismatches. In recent years the chief economist of the Bank for international settlements observed, companies from Russia, China, Brazil and India, rapidly increase borrowings, primarily in us dollars. Although until recently it's all arranged, if and when the dollar will suddenly rise, this debt could destabilize the situation, as he served for the most part due to revenues in national currency.
"Unfortunately, accurate data on currency mismatches at us a little, — said Borio. — However, we know that we are talking about significant sums". If the dollar rises, they can dramatically increase the debt burden, he added.
The words of Mr. Borio was even more timely than he thought. This week collapsed bonds of Russian energy company Gazprom, one of the largest issuers in emerging markets. Their yield, which in early November, 6%, has almost reached 10%. And as Russian companies now have faced the implications of lower oil prices and the falling rouble, there is reason to suspect that such companies, as "Gazprom", there will be problems with repayment of external debt.
The total amount of foreign debts of Russian business is about $ 600 billion. While Western sanctions have restricted both the ability of Russian banks to provide loans and opportunities non-banking sector to use world capital markets. And if Gazprom, at least there are dollar sales, for many companies it is not.
On Thursday, Russian President Vladimir Putin has tried to alleviate these fears, promising support companies and banks. This allowed the ruble collapsed to a record low, partly to restore the position, but not made to disappear more extensive risk factors. The fact is that, although Russia is the extreme example of the problems that are bothering the BIS, she is not alone.
Let's look at the numbers. According to the BIS, amount outstanding of international debt securities, which were issued by companies from emerging markets, is 2.6 trillion dollars. Three quarters of these debts are denominated in the U.S. currency, and a significant — although hard to tell exactly what is their part maintained at the expense of income in local currencies, argues the BIS. In addition, borrowers from emerging markets took loans from foreign banks in hard currency. The total amount of these loans reaches up to 3.1 trillion dollars. Particularly active in recent times was occupied by companies from countries such as China.
According to Frederick Neumann (Frederic Neumann) from HSBC, this implies a very interesting conclusion. It turns out that the ratio of borrowed funds to their own companies in the same Asia, is now higher relative to GDP than it was before the Asian financial crisis of 1998. Even more dangerous that the above figures may understate the risks — many companies from emerging markets use offshore firms to raise funds, and keep track of these flows difficult.
Evaluation of the BIS, about half of the debt securities sold between 2009 and 2013, companies from emerging markets, as well as taken a fair amount of these companies the loans have passed through offshore subsidiaries. Such structures usually transfer money from dollars to local currency and send them back to the parent company.
For example, Brazilian, Russian and Chinese companies in the first quarter of 2013 the volume of domestic financial flows of this kind amounted to about $ 35 billion. In reporting this money is often not recognised as debts, but as a "foreign direct investment". So, how big are the risks associated with currency mismatch, it may become clear only in the future.
That should be done? First, foreign investors makes sense to pay more attention to the mismatch between assets and liabilities, hidden emerging companies from emerging markets. This may seem obvious, but it is striking how often a desperate desire for profit makes Western investors to ignore such things and blindly rush for assets from emerging markets.
Secondly, the countries "the Big twenty" leading economies should demand of their companies for greater transparency in relation to offshore funding. In particular they could support the efforts of organizations such as the London-based database OpenCorporates who are trying to share information about the subsidiaries of corporations (including bearing quite different names).
In addition could be increased efforts to create a database of "legal entity identifier", undertaken by the Office of financial research U.S. and other Western agencies.
Anyway, this tumultuous week must be disturbing. And we'd better listen to him before in U.S. interest rates will rise.
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