The quake that ripped through the global financial system in 2008 had its epicentre in global banks that had made risky lending bets. Will the next crisis emanate from the dollar debt that has piled up in the balance sheets of firms in emerging markets?
A Bank of International Settlements (BIS) study says that the accumulation of dollar debt in emerging markets makes them particularly vulnerable to capital outflows. Large outflows could lead to contagion. BIS has assessed the vulnerability based on credit gaps, property price gaps and debt service ratios. India seems to be well placed, especially because bank credit is growing more slowly than the underlying economy. China, Brazil and Turkey seem to be the most fragile.
China has a credit bubble, falling property prices and a massive increase in corporate debt. How its government deals with these financial pressure points will be critical for the global economy.