Huge Wave of Bankruptcies

Will the ever strengthening US dollar result in a huge wave of bankruptcies such as is predicted by Casey Research?

Low interest rates in the U.S. have also encouraged companies in emerging markets to borrow record amounts of U.S. dollars. The Wall Street Journal reports:

“…the amount of dollar-denominated loans to borrowers in emerging markets, excluding banks, has nearly doubled since 2009 to more than $3 trillion.”

Brazilian companies alone have amassed $270 billion in foreign debt since the last financial crisis. Bloomberg reports that banks and non-financial companies in Brazil have doubled their dollar-denominated debts since just 2007.

Regular Casey readers know the U.S. dollar has soared 20% vs. other major currencies in the past 12 months. This is a HUGE problem for foreign companies that have borrowed U.S. dollars. Take Brazil, for example. The Brazilian real is down an incredible 40% vs. the dollar since the beginning of 2015. This means that a Brazilian company that borrowed in dollars suddenly owes 40% more.

To Brazil we can add oil exporters such as Russia and Colombia as well as anyone who has seen their currency slide versus the dollar, such as the EU and China! The cost of repaying dollar denominated loans has gotten progressively higher as the dollar has climbed. If, in fact, a huge wave of bankruptcies occurs, how will this affect the world of Forex?

Chinese and Other Hard Landings

The value of a currency is closely tied to the success of an economy. As China’s economy slows its currency falls. As China buys fewer raw materials from Brazil, Australia and many other nations their economies suffer and their currencies fall. Barron’s looks at this issue from the investor’s viewpoint in their article about questions every China investor must ask.

The [manner in which] the authorities handled the stock market rout and communicated the change in the exchange rate regime seem to have raised doubts about their capability to manage macroeconomic and financial stability risks.

The Forex result of the Chinese economic downturn was a three percent drop in the value of the Yuan. Many believe that if the People’s Bank of China truly lets the Yuan float that it will fall several percentage points farther. A steep drop in the Yuan could lead to more competitive devaluation of currencies in Asia and elsewhere across the world, the Forex race to the bottom. The concern of a strong US dollar is that it could indeed cause bankruptcies and subsequent currency fluctuations would result in very chaotic Forex market. Many business loans in China are, in fact, denominated in dollars and not in Yuan. A strong US dollar really could cause a rash of bankruptcies as China’s economy slows.

Forex Chaos

When governments, like those in Brazil, Argentina or Venezuela go broke, the result echoes through the Forex markets. The US Federal Reserve backed off even a small increase in US interest rates. And the global economy was part of what they considered in making their decision.  If a wave of business and government bankruptcies ensues the Forex markets will go into a frenzy of readjustments and extreme volatility.