Most companies are not insured against an appreciation in the value of the U.S. dollar / Photo from раpera.ru
Many developing countries have taken advantage of low interest rates in the United States to raise loans in U.S. dollars. Amounts are alarmingly large. An increase in the exchange rate may provoke a domino effect that could translate into a new debacle in the global economy.
Winand von Petersdorff writes this in his article "A threat of a new financial crisis" that was published on the website of the German newspaper Frankfurter Allgemeine.
We have not yet recovered from the previous financial crisis, Petersdorff writes, as we are facing a new problem: the financial crisis that originates from the emerging economies against the backdrop of a stronger dollar. Managing Director of the International Monetary Fund, Christine Lagarde, has recently made this point in almost all major speeches. This shows that the IMF is seriously concerned about the matter.
Many developing countries have taken advantage of U.S. low interest rates for borrowing funds in U.S. dollars. This relates primarily to the companies in developing countries, which have attracted a lot of loans, are now suffering from a significant decline in prices for raw materials and are forced to address rising debt servicing costs. Many companies are not immune from an appreciation in the value of the dollar, the IMF argues.
Risks of an appreciation in the value of the dollar
Therefore, for some of the countries, a stronger dollar may become a real disaster. Over the past six months the U.S. currency has gained twelve percent of its value against major world currencies.
A further increase in dollar value, especially against the currencies of developing countries, would be dangerous because these countries are struggling hard enough to cope with further crises. BRIC countries – Brazil and Russia – are between stagnation and depression, China's growth has slowed, and India seems to be the only one to start enjoying a period of economic prosperity.
Loans worth of two trillion dollars
The amount of dollar-denominated loans in developing countries is alarming: according to the Bank for International Settlements (Geneva), the corporate sector in developing countries has on its balance loans worth of two trillion dollars. Any further increase in the value would expose those companies to stress, warns Desmond Lachman, an expert on Monetary Affairs of the American Enterprise Institute.
What can trigger a further increase in the value of the dollar? Further dollar trend is linked to actions of the U.S. Federal Reserve. Janet Yellen, Federal Reserve Chief, wants to normalize monetary policy and possibly even to raise slightly interest rates in June. That is the disturbing move for Christine Lagarde, the Managing Director of the International Monetary Fund: liquidity can evaporate quickly if everyone rushes for the exit at the same after the Federal Reserve raises interest rates.
The global economy had premonitions of such dangers in the past when emerging economies experienced large capital outflows in spring 2013 amid news that the Fed was considering scaling back its bond buying program. It also shows a devilish dilemma in the monetary policy of the United States: with cheaper money, they created an incentive to make borrowings in dollars, while it is much more difficult to set back cash flows.