Global financial watchdogs look to cut emerging markets vulnerabilities

The Board, which coordinates financial rules for the G20 group of nations, said the build up of largely dollar-dominated debt by developing countries had caused major stress when the coronavirus pandemic erupted in early 2020.

In some cases, currency slumps and capital outflows were comparable to the 2007-08 global financial crisis, with economies with higher levels of foreign currency debt relative to foreign exchange reserves often especially hard hit.

While emergency measures such as foreign exchange interventions, quantitative easing and currency swap lines from the Fed and other top central banks helped, the FSB said it was looking at preventive steps for the future.

It said there was a need to deepen local currency debt markets and foster a broader domestic investor base.

Big “open-ended” investment funds (OEFs), that saw clients rush to yank money out in the panic, would also be looked at, as could rules around major bond indexes that big money managers often use as guide of what countries debt to buy.

“The FSB is assessing the effectiveness of existing policy recommendations to mitigate liquidity mismatches in OEFs and will report on its findings, including whether these recommendations need to be enhanced, at the November G20 Summit,” it said.

More generally… there may be benefit in exploring how index providers could reduce their mechanistic use of credit ratings, for example by avoiding a rebalancing of indices during periods of stress.