IMF Turns the Crash Here into a Crash that ‘Could Happen’ Over There

Polite and subtle though she always is when talking about “those people” (as in her “Greeks have to learn to pay their taxes”), IMF Managing Director Christine Lagarde can be a regular Donald Trump when it comes to pinning Wall Street’s financial crash on “others.”  She prefers to call them “emerging market economies.”

Interviewed on CNBC on the latest IMF world economic survey, Madame said that world growth was going to keep falling and that the Federal Reserve could trigger an emerging-markets crisis by raising interest rates.  “Could” is the proper finance-speak verb for referring to what is already happening.

But the debt crisis is happening primarily in the “trilateral” economies, the trans-Atlantic London-Wall Street financial system and Japan.

Leveraged debt held by the U.S.-based banks, defined as junk bonds plus loans to already over-indebted companies, has zoomed up to over $3 trillion, and to roughly $2.5 trillion in Europe. A great deal of that debt is linked to collapsing commodities, as it was to collapsing real estate prices in 2007-08.

During 2015 the “spread” of the interest rates on that debt (how much higher they are than the interest rate on AAA-grade debt) has jumped from about 4.5% to just under 7%; and when this high-yield debt is connected to “energy commodities” (e.g., oil and gas firms), the spread has risen from 7% to over 11%.  Both spreads are rising.

The constant complaints about “no liquidity in bond markets” focus on this debt.  When defaults reach a point that suddenly most of the holders of this debt (U.S. mutual funds hold $1 trillion, for example) want to try to sell it, to investment banks, other broker-dealers, and hedge funds, those sharpies will apparently be able to “cover” only 5-10% of it, total.  This has already led to short-term interbank credit being cut back in the United States and Europe, as during 2008.

The cycle is exactly as described at length in the IMF report Lagarde is talking about.  But the bond-debt problems of a Petrobras, which that report makes the rule, are the exception: This crisis is centered in Wall Street and London.  And as far as Lagarde saying it “could happen if the Fed raises interest rates,” that is her well-cultivated manner of not discussing the actual rope in the house of the hanged.