In India, it is a leading electric utility, Jaiprakash Power Ventures, selling off facilities and negotiating with lenders to avoid a default, having increasing its debts thirtyfold in six years.
In China, it is one of the country’s largest real estate developers, the Kaisa Group, threatening to pay only 2.4 cents on the dollar to its creditors in the face of corruption investigations and a mass resignation of executives, leaving countless would-be Chinese home buyers stuck in the middle of a multibillion dollar standoff.
And in Brazil, a wave of bankruptcies among sugar producers has been driven not just by falling sugar prices, but also by debts that they owe in United States dollars, which are becoming more expensive practically by the day compared with the Brazilian currency.
These are all parts of the same story: The soaring value of the American dollar is rippling across the globe. As it rises, it is threatening emerging economies where companies have taken on trillions’ worth of dollar-based debt in recent years. The dollar rally has been driven by decisions by theFederal Reserve, which begins a two-day policy meeting on Tuesday. In fact, anticipation of the Fed meeting, where officials are expected to signal that interest rate increases could be near, has driven the dollar even higher in the last couple of weeks.
In effect, as Fed policy makers sit around a mahogany table in Washington to try to guide the United States economy toward prosperity, their actions are having outsize, often unpredictable impacts across the globe, owing to the dollar’s central role in the global financial system.
Years of low-interest-rate policies from the Fed have encouraged companies in these fast-growing economies to borrow dollars because they could do it more cheaply than if they took out loans in their local currencies, like the Indian rupee or Brazilian real. So they did: By September 2014 there were $9.2 trillion of such dollar loans outside the United States, up 50 percent since 2009, according to theBank for International Settlements.
Emerging Market Currencies Have Fallen Versus the Dollar
Percent change from May 1, 2013, versus United States dollar
%
0
-10
-20
-30
Indonesian Rupiah
Indian Rupee
Brazilian Real
Mexican Peso
Jul '13
Oct '13
Jan '14
Apr '14
Jul '14
Oct '14
Jan '15
Mar '15
As Raghuram Rajan, the Reserve Bank of India’s governor,put it earlier this year in an interview with Bloomberg Television, “Borrowing in dollars is like playing Russian roulette, especially if you’re borrowing relatively short term.” Much of the time it will work out fine, but when the value of the dollar rises, suddenly companies find that they need more of their local currency to pay back the dollars that have since gained in value.
And rise the dollar has. Since the Federal Reserve signaled in summer 2013 that it would wind down its “quantitative easing” policy of buying billions of dollars in bonds using newly created money — that the gusher of dollars flowing into the global financial system would come to an end, in other words — the dollar is up 25 percent against a basket of commonly used international currencies.
“Now that the dollar has strengthened and rates are on the rise, it presents a risk and a challenge to many emerging markets in that their debts have become more onerous, more burdensome,” said Hung Tran, an executive managing director at the Institute of International Finance, an association of global banks. “The challenge for authorities in emerging market countries is to understand to what degree their corporate sector is naked or exposed.”
Companies in emerging markets that are primarily exporters might be O.K. After all, their revenue is in dollars, and so it should keep pace with rising debt service obligations. But for those focused domestically, like real estate developers or electric utilities, a more expensive dollar can make it much more costly to service debts. Money coming in is in a local currency like the Indian rupee or the Malaysian ringgit, and it suddenly takes a lot more of them to pay debts owed in dollars.
Hyun Song Shin, who heads research at the Bank for International Settlements, argues that a rising dollar has an effect of tightening the supply of money across the global economy. A Malaysian company doing business with a South Korean company will frequently carry out transactions in dollars, not ringgits or won. Dollars will now be available on more stringent terms. Clearly, decisions made by Janet Yellen, the Fed chairwoman, and her colleagues in Washington can have a big effect on transactions even when no American companies are involved.
In some economists’ ears, that creates echoes of the crises that crushed East Asian economies in the late 1990s and Latin American economies in the early 2000s. In those cases, there was also a currency mismatch that sent the economies of South Korea, Indonesia, Thailand and Argentina into a tailspin.
The biggest difference this time around is that private companies, not governments, have incurred debt in a currency not their own. What is likely to follow are bankruptcies, layoffs and cost-cutting for individual companies that borrowed too aggressively. A vicious cycle of economic collapse and government austerity measures is harder to imagine.
And indeed, the rising dollar and falling emerging-market currencies cut both ways for the economies in question. Even as companies that gorged on dollar debt run into trouble, falling currency values make exporters more competitive on global markets. The International Monetary Fund projects that emerging economies worldwide will grow 4.3 percent this year, compared with 2.4 percent for the advanced economies.
In a wide-ranging speech last fall wrestling with the global impact of Federal Reserve policy, Stanley Fischer, the vice chairman of the Fed (and former governor of the Bank of Israel, where he grappled with powerful spillover effects from the Fed’s actions firsthand), discussed the risks emerging markets faced as rising interest rates in the United States drove up the dollar.
“It does not seem that the overall risks to global financial stability are unusually elevated at this time, and they are very likely substantially less than they were going into the financial crisis,” Mr. Fischer argued. “Nevertheless, it could be that some more vulnerable economies, including those that pursue overly rigid exchange rate policies, may find the road to normalization somewhat bumpier.”
This, he said, makes clear communication about the Fed’s intentions all the more important. With the central bank’s meeting this week and the day of tighter money in the United States inching ever closer, the multitrillion-dollar question for the global economy is, Just how many of these companies will ride out the bumps, and how many more will crash?
