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28 Jan 2014
Flash: Pay attention to risks on global financial stability - TDS
FXstreet.com (San Francisco) - Richard Kelly, Head of European Rates and FX Research, and Cristian Maggio, Senior Emerging Markets Strategist at TD Securities warned markets about the credit vulnerabilities that EM could experience in the months ahead.
Key Quotes:
Markets had been underestimating vulnerabilities driven by credit growth at their own risk and despite much better appreciation for the origins of crises.
The year has begun with a crowded consensus for ongoing global recovery to support long dollar and short fixed income positions.
Recovery remains our base case, but signals for DM improvement have led consensus into an unwarranted complacency as EM domestic credit still needs to adjust and the risk is that Turkey is just the first of the vulnerable economies to be impacted.
Many EMs may have avoided some of the necessary adjustment to slower DM growth in recent years thanks to financial innovation, with a rapid growth in EM corporate debt—especially hard currency EM corporate debt with issuance estimated at 3-4 times that of sovereigns.
Basel III guidelines provide for counter-cyclical capital buffers for the banking sector based on the early warning signals from the extent of credit outstripping the economy, which accurately signaled around three-quarters of subsequent financial crises within our sample of markets.
We warned investors throughout the second half of last year not to expect any sharp recoveries in EM assets. Fed tapering is a catalyst for some of the immediate concern, but there is an adjustment that is needed in domestic credit in a number of emerging markets that could require 6-18 months to successfully manage and unwind.
Key Quotes:
Markets had been underestimating vulnerabilities driven by credit growth at their own risk and despite much better appreciation for the origins of crises.
The year has begun with a crowded consensus for ongoing global recovery to support long dollar and short fixed income positions.
Recovery remains our base case, but signals for DM improvement have led consensus into an unwarranted complacency as EM domestic credit still needs to adjust and the risk is that Turkey is just the first of the vulnerable economies to be impacted.
Many EMs may have avoided some of the necessary adjustment to slower DM growth in recent years thanks to financial innovation, with a rapid growth in EM corporate debt—especially hard currency EM corporate debt with issuance estimated at 3-4 times that of sovereigns.
Basel III guidelines provide for counter-cyclical capital buffers for the banking sector based on the early warning signals from the extent of credit outstripping the economy, which accurately signaled around three-quarters of subsequent financial crises within our sample of markets.
We warned investors throughout the second half of last year not to expect any sharp recoveries in EM assets. Fed tapering is a catalyst for some of the immediate concern, but there is an adjustment that is needed in domestic credit in a number of emerging markets that could require 6-18 months to successfully manage and unwind.