Mobius: Learning from past crises

. In addition, the International Monetary Fund expects debt levels within developing economies to resume a “gradual decline” in 2011 from current levels of around 40% of GDP, while it estimates that the debt of developed nations will grow from 73% in 2007 to reach 110% of GDP by 2015.

Finally, credit default swaps (CDS) of some emerging market countries recently traded at lower spreads than those of some developed European countries. The spread between emerging market sovereign bonds and U.S. Treasuries narrowed significantly, from a six-year high of 865 basis points in October 2008 to 287 basis points at the end of July 2010.  Meanwhile, the cost of insuring European sovereign debt against default has almost doubled this year. Historically, the trading of sovereign credit default swaps (CDS) was limited to emerging markets, reflecting the credit risk associated with the government debt of these countries. Over the past months, however, an actively traded CDS market in industrialized sovereigns emerged as a result of the financial crisis and growing concerns relating to the solvency of developed economies. Contracts on Greece, Portugal and Spain are now higher than developing nations such as Russia, the Philippines and Thailand.

Although it is unrealistic to assume that the structural changes implemented in some emerging markets can completely shield them from the effects of future global crises, they seem to have borne the most recent global financial crisis reasonably well. While risks have not disappeared, things look a lot better today than they did 20 years ago. The growing use of derivatives contracts is just one of the many reasons to remain cautious, but I believe some emerging markets’ strong fiscal health are cause for hope and optimism.

Source: Mark Mobius, Investment Adventures in Emerging Markets, September 2, 2010.

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