Emerging-markets, EM, debt crises arrive every 15 or 20 years almost like clockwork.
The first crisis in recent decades began in 1982, reached a crescendo in 1985 and was not resolved until late 1989. That crisis involved mostly Latin American borrowers such as Argentina, Brazil and Chile (the so-called “ABC” debtors) and Mexico. It was not finally contained until the invention of “Brady bonds,” named after the Bush 41 administration Treasury Secretary Nicholas Brady, who used long-term Treasury debt to collateralize Latin American debt while the borrowers paid interest and bought time to get their houses in order. I worked at Citibank in the early 1980s, so I was in the trenches for that crisis.
The next crisis was confined to Mexico in 1994, but that was quickly followed by a global crisis that started in Thailand in 1997 and spread to Malaysia, Indonesia, South Korea and Russia before landing at a Greenwich, Connecticut, hedge fund called Long Term Capital Management, LTCM. I know all about that crisis too because I negotiated the bailout of LTCM as their chief counsel.
After the Asia-LTCM crisis, the EMs built up what they called “precautionary reserves” so they could withstand a run on their currencies by foreign banks and speculators. That worked. The EMs sailed through the 2007–08 global financial crisis mostly unscathed.
Now, 20 years after the last EM panic, a new EM debt crisis is quickly emerging, as this article reports. Right now, the crisis is mainly centered in Argentina, which has asked for IMF emergency funding. But Venezuela has already defaulted on some external debt as well. As in 1997, the panic will not be confined to one country. Turkey, Ukraine, Chile and South Africa are all highly vulnerable as well.
The world has still not recovered from the 2007–08 panic and is not ready for a new crisis. I saw the last two EM crises from a front-row seat, so I know how they proceed. Individual investors should get ready with increased allocations to cash and gold.
Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.