… could the emerging world now be a destination for those looking for security? That is what the credit markets say. Either they are wrong and emerging market credit is in an incipient bubble, or we need to turn received wisdom on its head.
What is fascinating is the market’s comparative judgment of the risk in emerging markets. Insuring against a default in China is exactly as expensive as in the UK – 0.6 per cent. The list of countries deemed safer than Italy (1.82 per cent) includes Mexico, Brazil and Chile, Russia, and even Indonesia (1.39 per cent).
This relative judgment on the emerging world has completely reversed in the two years since the aftermath of the Lehman Brothers bankruptcy seemed likely to tip over into an emerging market debt crisis. Then, insuring against an Indonesian default cost 12.47 per cent.
Back then, emerging markets were victims of a “risk off” trade. Investors got out as quickly as they could. This time, in spite of no shortage of true panic about sovereign debt in the eurozone, investors are not responding by selling emerging market debt.
The obvious explanation is “it’s a bubble!”, but the article goes on to suggest that it’s the very lack of financial sophistication in developing economies that may make them safer – a lower likelihood of speculative trader voodoo taking down entire countries, for example.
… this is not just about avoiding the west; emerging markets have advantages. They do not have expensive welfare states, so it is easier to keep their fiscal houses in order. They have less heavily developed financial sectors and banks that for the most part did not go overboard in the way that they did in western Europe and the US. Ireland’s banking sector grew far too big for its government to be able to rescue it without pain. If you want to avoid such risks, put your money in places such as Indonesia and Brazil.
I’m no economist, of course, so I’m not going to call it either way, but I think it’s interesting to consider the possibility that the “developed” economies are actually overdeveloped, a dead-end branch of excessive complexity on the tree of economic evolution.
[ * That link will probably smoosh you straight into the FT’s paywall, but if you Google one of the paragraphs above and click the correct link from the search results, you’ll be able to read the article in full. ]