What is the common denominator between Kaisa Group in China, Jaiprakash Power Ventures in India, dozens of sugar mills in Brazil and most companies in Russia and South Africa?
They will all get crushed and declare bankruptcy should the Federal Open Market Committee decide to withdraw the word "patient" today from its statement.
In India, Jaiprakash Power Ventures, a leading utility vendor that had increased its debts 30-fold in six years, is now selling off facilities and negotiating with lenders to avoid a default. 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 homebuyers stuck in the middle of a multibillion-dollar standoff.
Similar stories are emerging out of Brazil and South Africa. For Russia, they face a very tough economic uphill battle due to the collapsing oil prices but are now compounded with a surging U.S. dollar and the threat of rising interest rates.
These are all parts of the same story: The soaring value of the U.S. 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 the Federal Reserve, which has indicated that rates might rise soon.
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 U.S., up 50 percent since 2009, according to the Bank for International Settlements.
This is a huge ramp up of U.S. dollar debt by private companies around the world. If we start counting the debt racked up by central banks around the world, the $9 trillion figure will easily double, if not more.
If and when interest rates rise, the repayment of these dollar loans will have to come at much higher local currency rates. Therefore, interest costs will shoot up in individual company financial statements and make the global central banks much weaker due to higher level of debt service costs.
An Indonesian company doing business with a Philippine company will frequently carry out transactions in dollars, not the rupiah or peso. Dollars will now be available on more stringent terms. So you can see how the Fed's decision today will affect the world even when no U.S. companies are involved.
The U.S. dollar is up roughly 25 percent against the basket of global currencies, as indicated by the Dollar Index.
The situation is quite grim and has an eerie feeling of a repetition of the Asian Currency crisis of 1997. What may make it worse is that this time it is not just government agencies that have borrowed but many private companies too. It is likely that we will see 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.
Let's just hope that the Fed recognizes what its insane policies have done to the world and how it would be very selfish if it did not care for its trading partners when it decides to raise rates. Friends of the U.S. are hard to come by these days. Basically the Fed is caught between a rock and a hard place.
While I do not advocate low interest rates forever, it might be prudent to hold off a bit and allow the BRICS to rotate out of the U.S. dollar debts by allowing the U.S. dollar decline. Just announcing a delay in raising interest rates for a year would bring much needed relief worldwide.
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