A combination of shocks is rippling through emerging market economies and has sparked soaring food and energy inflation, power blackouts, and social unrest. Countries with the weakest balance sheets and high debt loads appear to be sliding first into turmoil. This could be the beginning innings of an emerging market crisis last seen in the 1990s when socio-economic distress toppled governments, according to Bloomberg.
Already, skyrocketing food and energy prices have caused turmoil in Sri Lanka, Peru, Egypt, and Tunisia. The chaos could broaden as some emerging market countries, heavily saturated with debt, could be shocked by higher debt-servicing costs as the Federal Reserve embarks on an aggressive tightening campaign. This couldn't have come at the worst time for these developing nations, as many had large capital outflows and borrowed vast amounts of money during COVID. Now they're being hit by food and energy shock due to the Ukraine conflict.
An example of this toxic cocktail that could easily topple a country is Sri Lanka has already been pushed to the brink of default. The South Asian island nation's foreign exchange reserves have collapsed, and food and fuel shortages, plus high inflation, have sparked unrest.
Bloomberg Economics shows a handful of other emerging economies at risk of crisis because of high debt and soaring yields. Notably, Ethiopia, El Salvador, Tunisia, Pakistan, and Ghana rank are the most at-risk because surging bond yields create higher default risk.
The Washington-based lender, International Monetary Fund, raised concerns in a recent report titled "Emerging-Market Banks' Government Debt Holdings Pose Financial Stability Risks," which warned government defaults like what happened to Russia in 1998 and Argentina in 2001-02 could be imminent across emerging market economies.
The report warned of a possible return of a "doom loop":
A sharp tightening of global financial conditions—resulting in higher interest rates and weaker currencies on the back of monetary policy normalization in advanced economies and intensifying geopolitical tensions caused by the war in Ukraine—could undermine investor confidence in the ability of emerging-market governments to repay debts. A domestic shock, such as an unexpected economic slowdown, could have the same effect.
Yellen Cautions EU On Russian Oil Ban: 'More Harm Than Good'
Julianne Geiger via OilPrice.com,
A full EU ban on Russian crude oil and gas imports could have unintended economic consequences for the United States and its Western allies, U.S. Treasury Secretary Janet Yellen told reporters in Washington on Thursday. The Treasury Secretary added that such a ban could do more harm than good.
Europe does need to reduce its dependence on Russian oil and gas, Yellen said, "but we need to be careful when we think about a complete European ban on, say, oil imports."
Europe has been under pressure to stop purchases of Russian oil and gas—an action that would cut off revenue streams for Russia, but would also starve the EU of much needed energy supplies.
Yellen’s warning follows JP Morgan’s from earlier this week that suggested a full and immediate ban in the EU on Russian energy supplies would cut off more than 4 million bpd of Russian oil and send crude oil prices to $185 per barrel.
The EU and the European Commission has been discussing an embargo on Russian crude oil, but the group is divided on the issue, with countries such as Germany strongly opposed due to its significant reliance on Russian energy supplies.
Even if all EU members do agree on such a ban, it would still take months to draft and prepare, European officials said last week. The EU is already in talks with other oil-producing countries with the end goal of obtaining alternative oil suppliers so it can more readily wean itself off Russian oil supply.
Meanwhile on the streets of Berlin...
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