Morgan Stanley warns on Asian debt shock as dollar soars
"While the region’s bond markets have been calm in 2014, the risks are rising, including earlier than expected interest rate hikes by the Federal Reserve" – The Asian Development Bank.
Investment bank Morgan Stanley says debt ratios in developing Asia have surpassed extremes seen just before the East Asian financial crisis blew up in the late 1990s and companies have borrowed unprecedented sums in dollars, leaving the region highly vulnerable to US monetary tightening.
The bank said foreign debt in emerging Asia has soared from $300bn to $2.5 trillion over the last decade, creating the risk of a currency shock as the dollar surges to a four-year high and threatens to smash through key technical resistance.
Morgan Stanley’s currency team said the region could be hit on two fronts at once: a credit squeeze as rising US rates push up borrowing costs across the world, combined with an exchange rate squeeze on "short" dollar positions. The response to one complicates the other.
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Frequently Asked Questions about this Article…
Morgan Stanley is concerned that debt ratios in developing Asia have surpassed levels seen before the East Asian financial crisis, with companies borrowing unprecedented sums in dollars. This makes the region vulnerable to US monetary tightening.
Foreign debt in emerging Asia has increased from $300 billion to $2.5 trillion over the last decade, according to Morgan Stanley.
The rising US dollar is a concern because it could lead to a currency shock, especially as it reaches a four-year high. This could affect Asian markets that have significant dollar-denominated debt.
US interest rate hikes could lead to a credit squeeze by increasing borrowing costs globally, which would be particularly challenging for Asian economies with high levels of dollar-denominated debt.
Asian companies with 'short' dollar positions could face an exchange rate squeeze, as they may need to pay more in local currency to settle their dollar-denominated debts if the dollar continues to strengthen.
Morgan Stanley suggests that interest rate hikes by the Federal Reserve could occur earlier than expected, which would increase the risks for Asian markets.
Morgan Stanley compares the current Asian debt situation to the period just before the East Asian financial crisis in the late 1990s, indicating similar levels of risk due to high debt ratios.
Morgan Stanley identifies two main risks: a credit squeeze from rising US interest rates and an exchange rate squeeze from a strengthening US dollar, both of which could severely impact Asian markets.
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