Developing world to face wave of defaults – Bloomberg

National bankruptcies to precede political instability in emerging economies

Emerging nations, including El Salvador, Ghana, Egypt, Tunisia and Pakistan, will be challenged with a historic cascade of defaults as a quarter-trillion-dollar pile of distressed debts keeps exerting downward pressure on economies, Bloomberg is reporting.

“With the low-income countries, debt risks and debt crises are not hypothetical,” the World Bank’s Chief Economist Carmen Reinhart told the agency on Saturday. “We’re pretty much already there.”

Over the past six months, there’s reportedly been a doubling in the number of emerging markets with sovereign debt that trades at highly distressed levels, meaning yields that indicate investors believe default is a real possibility.

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Another cause for major concern reportedly arises from a potential “domino effect” that commonly occurs when scared investors begin yanking money out of countries with economic problems similar to those defaulting nations had previously gone through.

In June, traders reportedly pulled $4 billion out of emerging-market bonds and stocks, marking a fourth straight month of outflows.

Probable defaults may be followed by political instability. Earlier this year, Sri Lanka was the first nation to stop paying its foreign bondholders, burdened by unwieldy food and fuel costs that fueled protests and political chaos. 

“Populations suffering from high food prices and shortages of supplies can be a tinderbox for political instability,” Barclays has said, as quoted by Bloomberg.

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