Morgan Stanley warns on Asian debt shock as dollar soars

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.

"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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