Nov 15, 2016
Borrowing costs for governments across the world have increased sharply since Donald Trump's U.S. election victory, as investors believe the new president's policies will speed the pace of interest rate increases. Emerging economies have been hardest hit, with fears growing that existing trade deals could be torn up.
Many emerging markets rely on cheap exports, much of which are sold to the United States. These countries have felt the biggest economic shocks from the political earthquake in Washington.
"Effectively, we have seen investors pulling out of emerging markets," , said analyst David Rees of Capital Economics. "Basically, the Trump victory has hit risk appetite, given his fairly vitriolic approach to emerging markets and free trade. And investors have basically taken a flight to safety."
That meant a major sell-off of risky emerging market debt and currencies, which have seen big losses against the U.S. dollar. If the sell-off continues, the economic pain will be felt by ordinary citizens.
"You are going to get lower economic growth, lower jobs growth, lower wage growth, et cetera," as well as "potentially higher interest rates for debt servicing if currencies are falling and inflation pressures are building," Rees said.
Those pressures have forced up bond yields, or the interest rate the governments have to pay to borrow money, and not only in emerging markets.
In Italy, bond yields hit an 18-month high as the global upward trend was compounded by political uncertainty over an upcoming referendum.
"I think there is a concern that if bond yields start to edge even higher from where they are now, we could actually see a little bit of a squeeze on borrowing costs of those areas of the European economy in particular that can least afford it," , said Michael Hewson of CMC Markets.
Mexico's borrowing costs have hit five-year highs following Donald Trump's election, given his pledge to build a wall on the border and deport millions of illegal immigrants. So, could the world see a return to the so-called "credit crunch" that followed the 2008 financial crisis.
"Obviously, Mexico is quite a special case in terms of its close relationship with the United States and Trump's particular focus," Rees said. "Elsewhere, yields are still relatively low at the moment, so we are not running into this kind of credit crunch situation."
Analysts said that investors had been reassured by Trump's conciliatory tone since the election. But they predicted heavy market losses if he follows through on campaign pledges to tear up global trade deals.