Bad Loans Could Spark an Emerging-Markets Crisis

The world’s largest emerging markets recovered quickly from the 2008 financial crisis because consumers and companies went on a borrowing binge. Now, as those economies cool, bad loans are haunting banks from Turkey to South Africa. India is injecting money into state-run lenders facing a huge rise in soured debt, and Chinese banks have been told to increase provisions against lending losses. “Credit growth in emerging markets has been phenomenal since 2008,” says Satyajit Das, author of a half-dozen books on financial risk. He blames near-zero-percent interest rates in the U.S. and other developed nations, which have kept borrowing costs artificially low. “Many borrowers will struggle to repay the debt,” he says. “We’re ripe for a new emerging-market crisis.”

Credit growth has outpaced economic growth in most emerging markets. In China, borrowing by companies surged to 132 percent of gross domestic product last year, from 104 percent in 2008, according to the World Bank. In Turkey it jumped to 54 percent from 33 percent, and in Brazil to 68 percent from 53 percent. Consumer debt is growing as fast in some countries. Like their rich-country counterparts, emerging-market governments probably will rescue failing banks, Das says. That would push public debt levels higher, trapping some countries in a vicious cycle of rising debt burdens and falling currencies.

Defaults on consumer loans at Brazilian banks rose to a record 8.2 percent in May 2012 before easing to 7 percent in September this year. President Dilma Rousseff has vowed to limit lending by the three state-owned banks

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