Emerging Market Companies and Banks Pose Risks to Financial System with Global Borrowing Spree

Summary

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Corporations based in emerging market countries have increased their global borrowing substantially in recent years, putting themselves at risk to a sudden shift in investor sentiment and a turn in the global credit cycle, according to an analysis by the World Bank. Banks' exposure to foreign-currency borrowing should be given special attention, the report says. Concerns are growing that some of these banks are increasing their foreign exchange exposure to levels that have the potential to jeopardize financial stability. With global financial markets operating in recent years with unprecedented liquidity; heightened risk appetite among investors, and a spectrum of new players and actors, the possibility of corporate credit spreads underestimating their long-term equilibrium levels is a real one. As capital markets have integrated rapidly over the past few years and as developing-country corporations have been raising funds overseas, the need for a more coherent global approach to regulating cross-border public offerings and listings of securities has become more urgent.

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Extract

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Emerging Market Companies and Banks Pose Risks to Financial System with Global Borrowing Spree

Corporations based in emerging market countries have increased their global borrowing substantially in recent years, putting themselves at risk to a sudden shift in investor sentiment and a turn in the global credit cycle, according to an analysis by the World Bank.

Private and state-owned corporations in developing countries raised an unprecedented $333 billion through syndicated bank loans and international bond issuance in 2006, up sharply from $88 bil...

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