Emerging Markets at Risk of Sudden Stop, says Auvest Capital

December 19, 2011

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Early signs of credit bubbles and inverted yield curves in emerging markets provided ample warning to those that were paying attention.

The setup was there, but forecasting the trigger was difficult. Often, emerging market bubbles are pricked when interest rates are hiked in the center country (the United States today), but with the Fed dedicated to blowing another bubble no matter the repercussions, an interest rate hike will not happen anytime soon.

However, Auvest Capital has identified another catalyst, Europe, amid a retrenchment in European bank lending to Emerging Markets, asset sales to shore up balance sheets, a drop in collateral values, and Basel’s higher capital requirements. This spells doom, says Humayun Shahryar.

Bank of International Settlements (BIS) figures for the period ending June 2011 show European banks had about $500bn in credit outstanding to Africa and the Middle East, $1,500bn to Asia, $850bn to Latin America and $1,300bn to eastern and central Europe.

Bad debts and inflation risks will hamper China and India’s capacity to respond.

Source : FT

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