(Bloomberg View) — For investors seeking reasons to worry about banks, here's another: They've lent a lot of money in currencies that borrowers will have a hard time paying back.
The phenomenon illustrates how capital flows work in a financially integrated world — and how they can contribute to booms and busts. As the U.S. Federal Reserve and the European Central Bank held interest rates extremely low to support their own economies, they pushed banks to seek higher returns elsewhere, and also made borrowing in their currencies very attractive all around the world.
The result was that the total amount of dollar and euro lending to non-bank borrowers outside the U.S. and the euro area grew 57 percent during the past six years — to $12.7 trillion, according to the Bank for International Settlements. Here's how that looks:
Such rapid credit growth is a classic precursor of financial crises, and the foreign-exchange element adds a nasty twist. The Fed's plans to increase interest rates, together with growing concerns about emerging markets, have caused the value of the dollar to rise sharply against a range of currencies.
The euro has gained against some currencies, too. So for borrowers in countries such as Brazil and Turkey, whose currencies have weakened, the cost of paying back all that debt has shot up. Here's a breakdown by country, estimating how much the local-currency value of dollar and euro debt to banks (including that of financial institutions, companies and governments) has grown as a share of gross domestic product during the past two years, due to exchange-rate changes alone:
