VanEck - A Global Investment Money Manager Based in New York City-VanEck

Video Viewpoint

Seasoned investment professionals, sector-dedicated analysts, and creative thinkers are at the heart of our business. Get their perspective on today's market climate.

All Videos

Video Transcript

Emerging Markets Bonds Then and Now: From Weakness to Resilience

The Original Sin: Too Much External Debt

ERIC FINE: In the old days, what led to the EM crises? I define the old days as the 80s and 90s. That was the beginning of the EM debt asset class. Why were there so many crises? The simple reason is: debt composition. Too much dollar-denominated debt.Now, there was a reason behind it. There was low domestic savings and economic policy didn't encourage people to trust governments, banking systems, or central banks in these countries. This was the only market they had access to. The only place they could borrow from was the U.S. financial system. Whatever the reasons—and I do think the reasons were structural in nature—debt composition was mostly dollar-denominated. What does that mean? It means that when you have a crisis that puts pressure on your currency, your ability to repay debt decreases. You're in a vicious circle. Your currency weakens and it's harder for you to repay your dollar debt. Therefore your currency weakens more. It becomes even harder to repay your dollar debt. Thus it was a vicious cycle. Throughout this process that undermined governments’ ability to repay debt; governments used their central banks to defend their exchange rate to prevent a deteriorating ability to repay debt. Those efforts were very short-lived. Governments ended up even worse off because they ended up wasting a lot of reserves and still ending up with an inevitable default. It was essentially debt composition at fault because these countries were too dependent on dollar-denominated debt through the U.S. financial system.


The Washington Consensus: Economic and Financial Policy Reforms

FINE: What did emerging economies do to get themselves out of this? Many of them defaulted and reduced their amount of debt. To generalize, you had fiscal adjustments and dramatic reductions in budget deficits. There were structural reforms as well; letting insolvent banks and companies go bust is painful in the short term but healthy in the long term. You had the beginning of far more independent inflation-targeting central banks that would let the exchange rate float, which could be inflationary, but not if you have anchored inflation expectations via good fiscal policy, which is reform number one, essentially. The basic response was fiscal improvements, structural improvements, letting companies and banks default, and forcing restructuring and floating exchange rates, which did not feed through into long-term inflation expectations because fiscal changes anchored them. That was the basic policy response.

Results of EM Reforms

FINE: What's the "so what?" of the Washington Consensus? What did it do to the bond market? Number one is it resulted in higher reserves. Most of your debt is not dollar-denominated. It's mostly domestically-denominated. In domestic currency, you don't need to waste reserves to protect an exchange rate level. You'll thus see reserves in almost all the major EMs increase on a secular basis. That's very practical because it means dollar-denominated debt becomes a much safer asset class. Number two is it generally resulted in higher growth rates. Those were the two biggest implications of the Washington Consensus and the move away from the original sin of having too much dollar-denominated debt.

Global Financial Crisis Taper Tantrum Tests

FINE: What is the proof? How do we know whether this worked? With respect to the '08/'09 crisis, emerging markets were part of the answer. China was able to stimulate, i.e., increase fiscal and monetary stimulus in response to the crisis. In the old days, they'd have to do the exact opposite. They'd have to hunker down and suffer a much worse crisis. A number of the EM countries didn't even go through recession in one of the biggest financial crises in history. That's one general example of this working. The other one is the taper tantrum. The Fed signaled that it was going to end the latest phase of quantitative easing that it had engaged in and the market decided it was worried about countries with large current account deficits: Turkey, South Africa, India, Indonesia, and Brazil. What did all of those countries do? They let their currencies weaken and they let their interest rates rise. Even Argentina did that. That is not good if you own those currencies or those local currency bonds. If you own duration in local or if you own the currency, that's not good. However, if you owned dollar-denominated bonds, that was good. Moreover, weakening your currency and hiking interest rates directly addresses the current account deficit. All of a sudden, they weren’t afraid of letting their currencies weaken because it wasn’t going to turn into a vicious debt cycle. It would actually address the specific problem. Those to me are the two best examples of what this new policy framework means for emerging markets bonds.

- - - - - - - - - -

For more information, please visit our website

All charts referenced in the video are for illustrative purposes only and are not indicative of future results; current data may differ. Forecasts, estimates, and certain information contained herein are based upon proprietary research, and the information contained in this material is not intended to be, nor should it be construed or used as, investment, tax, or legal advice, any recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security, strategy, or investment product. References to specific securities and their issuers or sectors are for illustrative purposes only and are not intended, and should not be interpreted, as recommendations to purchase or sell such securities or gain exposure to such sectors.

The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about Van Eck Funds, Market Vectors ETFs or fund performance, visit Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at

Fixed income securities are subject to credit risk and interest rate risk. High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities. Bonds and bond funds will decrease in value as interest rates rise. International investing involves additional risks, which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity, and political instability. Changes in currency exchange rates may negatively impact an investment’s return. Investments in emerging markets securities are subject to elevated risks, which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict, and social instability.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation. © 2015 Van Eck Global. All Rights Reserved.

Van Eck Securities Corporation, Distributor