In emerging markets, bond issuance used to be the preserve of sovereigns, but over the past decade bank activity in the Eurobond markets has ballooned. 

Worries over a debt overhang in emerging markets (EM) are mounting, especially as higher interest rates in the US entice investors to pull back from the search for higher yields overseas. A chunk of that debt has been issued through Eurobonds with EM banks playing no small role in building this market.  

Eurobonds have now overtaken syndicated loans as the main form of financing for EM banks, according to a research note by Renaissance Capital, an investment bank specialising in the developing markets.

Chart one

The single largest increase took place in China, where banks have increased their Eurobond burden by $143bn over the past decade, a 24-fold increase (see chart). It is followed by South Korea, where Eurobond financing has been popular for more than a decade.

The third biggest EM issuer is Russia, although its Eurobond debt burden peaked in 2014. As sanctions hit, its domestic banks found themselves starved of access to US dollars and euros, imperilling their ability to repay foreign currency debt. However, the central bank shrewdly helped local banks to maintain foreign exchange (FX) liquidity through the use of FX auctions and repo facilities.

Banks from other commodity-dependent countries are also keen Eurobond issuers. After Russia, banks from Brazil have the largest Eurobond debt. Local banks owe $75.8bn on the international capital markets, down from a peak of $87.4bn in the second quarter of 2014.

Other significant borrowers in the Eurobond market include the Gulf states. Banks in the United Arab Emirates and Qatar have been under pressure as the oil price halved in 2015, but they are still issuing debt at a steady pace. The Gulf banks are renowned for their strong balance sheets, and the high FX reserves held in these countries mean that some time will pass before they might feel debt pressures.

However, banks from other commodity-oriented countries might not have that luxury. Banks in India, Kazakhstan and South Africa have struggled lately and having a debt burden denominated in foreign currency might not make things any easier for them. India has the highest amount of Eurobonds outstanding, at $39.39bn. It is followed by South Africa with $16.06bn, and Kazakhstan at $11.04bn. 

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