Emerging Market Debt: the 1980s Elephant in the Room

Between 2005 and mid-2015 emerging market corporate debt rose from $900 bn to $4.4 trillion. (Central bank easy money had to go somewhere.) Total debt of emerging market countries went from $5.4 trillion to $24.4 trillion during the same period. (This includes both local currency and foreign currency debt.) Total debt is now 90% of average GDP for these countries. (data from today's FT)

This debt is largely supported by the proceeds from the sale of commodities.

Latin America had a similar quadrupling of debt in the ten years before August 1982 when Mexico suspended all debt payments. The current situation is somewhat similar, except that the emerging countries have relatively more local currency debt today.

In the 1970s, the recycling of petrodollars fueled the debt boom. In recent times, it has been the search for yield and central bank liquidity.

In the case where there is not a dramatic increase in commodity prices from today's levels (e.g. a doubling) it is hard to see how a 1980-like third world debt crisis can be avoided in the near future. (The first world debt crisis looms, but is probably more distant.)

Unlike in 1982, the present crisis has been moving forward in slow motion for a number of years, so the adjustment in the 3rd world may be less brutal than in the 1980s. Local currency debt also provides a cushion of sorts.

Some sort of debt cancellation for both sovereign and corporate debt around the world in both developed and developing countries will likely solve the problem sooner or later, so there is some cause for optimism.