Leverage ratio and fragile behavior - no austerity in EME's

One of the big lessons we were supposed to learned from the Financial Crisis was that too much leverage will come back to haunt any consumer, investor, or country. There is no room for error.  High leverage leaves no margin of safety. Banks were to delever because we understood that financial and credit channels have macroeconomic effects. Companies need to have a cushion for when earnings decline. Consumers need to worry about excessive spending and leverage with illiquid assets like real estate. There are some exceptions with austerity in some countries, but it has been more a slowdown in trend as opposed to reversals in direction.

Of course, central banks then made the cost of money go to zero so that it seemed crazy not borrow. Real rates were negative and in some case nominal rates went below zero.  The result should not be surprising, firms, consumers, and government will eventually show fiscal prudence but perhaps later.

The BIS Quarterly Report provides one scary chart on the leverage in the global economy. The EME countries are all above the crisis levels of 2009. The advanced countries are also trending higher although the all bond issuers are still below highs. The EME levered up on cheap dollars and now we are seeing the fall-out. The downtrends will continue in these countries because the fundamentals tell a bad story.