Bernanke sees no EM debt crisis looming

Former US Federal Reserve chairman Ben Bernanke says emerging markets are now better placed to weather volatility emanating from a strengthening dollar than they were in the mid-1990s, when a similar currency trend triggered the Asian financial crisis.

Speaking at the Asian Financial Forum in Hong Kong this week, he said that while a rising greenback did put pressure on dollar borrowers with local-currency assets, the US currency's steady rise since 2014 hasn’t caused the sort of turmoil that took place in the lead-up to the 1997 crisis. The latter had begun when the Bank of Thailand was forced to break the baht’s peg to the dollar.

Moderator Andrew Sheng, formerly head of Hong Kong's securities regulator and now fellow at the Asia Global Institute, quizzed Bernanke about alarming reports from the Bank for International Settlements. The BIS, said Sheng, “reminded us that whenever the US dollar strengthens, the rest of the world gets into trouble”, citing the 1980s Latin America debt crisis and the Asian financial crisis.

“I wouldn’t call it an analysis,” Bernanke replied. “It’s just a correlation.”

The Latin America crisis occurred in a very different environment, when the Fed under Paul Volcker had quickly hiked short-term interest rates to more than 20% to stave off inflation. And while he agreed there were parallels today to the mid-1990s in Asia, Bernanke said the region’s authorities had far better means of warding off problems now. This is why, notwithstanding the mid-2013 ‘taper tantrum’, when the Fed first suggested it would end its programme of buying assets, markets remained calm when it did raise rates, in December.

Bernanke later added that China may now have accumulated too much debt, but that this debt was almost all internal, likening it to Japan’s situation of high but wholly domestic indebtedness.

Sheng started and ended on the session on a somewhat mischievous note. He had introduced the speaker by saying, “Hong Kong owes Ben Bernanke. After all, he runs Hong Kong’s monetary policy. He’s Norman Chan’s boss!” (Chan heads the Hong Kong Monetary Authority.)

And Sheng rounded things off by prodding Bernanke on the significance of the yuan’s admission into the International Monetary Fund’s special drawing rights (SDR) basket of currencies. “What if we gave the global central bank role to the IMF and used the SDR as the reserve currency?” he asked.

Bernanke had no theoretical objection to the SDR playing such a role, but said it wouldn’t happen – at least not in his lifetime.  “It’s not going to happen because the infrastructure doesn’t exist,” he said. “If I’m a trader and I want to have liquidity in securities, to buy and sell quickly, there’s no SDR market to trade in.”

Dollar-denominated financial assets exist in a huge, liquid and transparent market, with clear rules. And if that were no longer the case, traders and investors could go to other currencies to find a price. “But to go to the SDR would first require the issuance of a lot of bonds, the creation of a whole market,” Bernanke said. “That’s not being seriously considered today…there is no energy behind the idea of making the SDR a global currency.”