EM debt could face 'systemic crisis'

Emerging economies would face a systemic crisis if foreign investors, who own one-third of EM local currency debt markets, begin to pull out their cash, fund managers have warned.

Michael Riddell, manager of M&G’s Emerging Markets Bond fund, said earlier this year the market “must be smoking crack” to perceive EM debt as a safe haven. Now he fears an unwinding of the huge positions foreign investors have placed in EMD will result in a “systemic event” for emerging market economies. “A reversal of the huge capital inflows into EM debt would result in a total lack of liquidity and significantly higher borrowing costs for emerging market countries,” he said. “It will not be just the EM sovereigns that have come to rely on these capital flows and the cheap financin...