Felix Zulauf: "We have created the biggest excesses in generations"
Comment of the Day

April 06 2020

Commentary by Eoin Treacy

Felix Zulauf: "We have created the biggest excesses in generations"

Thanks to a subscriber for this interview of Felix Zulauf which appeared in market.ch. Here is a section:

Over the past decade, a huge mountain of Dollar denominated debt has been built up outside the U.S., especially in emerging markets, and particularly in China. According to the BIS, these loans increased from $5.8 trillion to more than $12 trillion between 2009 and 2019. When the crisis hits, short-term loans are often not extended because lenders turn risk-averse. Then debtors have to scramble to buy Dollars in the market. As the Dollar rises, the debt in the debtor's home currency increases, which in turn increases the pressure on them even more. Weak economies such as Turkey, Brazil and South Africa are caught in a vicious cycle. That's why I've been warning for some time about investing in emerging markets, including China. They just have a huge Dollar debt problem.

Do you expect a «Lehman Moment» in this crisis, the collapse of a major market player?

In every crisis there are companies that perish. It won't be any different this time. Given the excessive indebtedness in the corporate sector, one would have to expect some spectacular bankruptcies. But given the speed with which central banks have acted - much faster than in 2008 -, this will no longer threaten the financial system per se.

Eoin Treacy's view

Swap lines have been extended to considerably more countries than during the global financial crisis. In 2007, the focus of attention was the developed market banking sector so swap lines were limited to G-7 central banks. At the end of March that list was expanded to Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand. The notable exceptions have been to countries like Turkey, South Africa and China.

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