eyes on the U.S.

Why The Strong Dollar Could Trigger A Worldwide Economic Implosion

The U.S. currency is stronger on world markets than it's been in years, which could fundamentally undermine emerging economies that have borrowed trillions in dollars.

Why The Strong Dollar Could Trigger A Worldwide Economic Implosion
Daniel Eckert and Holger Zschäpitz

-Analysis-

BERLIN — The dollar is strong, stronger indeed than it has been for years. Fears that the world's leading currency could implode are now over. Good news, right? Not quite. Paradoxically, it is precisely this overly strong dollar that could threaten the world financial system. A growing number of experts worry that a severe debt crisis in the emerging economies may be brewing.

If the value of the dollar continues to rise, it could lead to a wave of bankruptcies in Russia, Brazil and other emerging economies, which would have a serious impact on Germany and other countries that rely on exports.

Where and why did this potential threat arise? Countries, corporate entities and private households have, globally, become indebted to the tune of $10 trillion. A growing share of the debt has been incurred within emerging markets.

This debt could also become an existential risk. Most of these liabilities are not in native currencies like the Brazilian real or Russian ruble, but in dollars. In times of relatively stable exchange rates and a strong world economy with robust commodities quotations, this would not be such a serious problem: Dollar revenues on the world markets make it possible for dynamic economies to meet the cost of interest and repayment.

Within emerging economies, borrowing in dollars amounts to $2.6 trillion. Add to that $3 trillion in international bank loans, and that makes for a significant sum — approximately equivalent to Japan’s economic power.

The Basel-based Bank for International Settlements (BIS), a kind of central bank to the central banks, warns in its December 2014 Quarterly Review, that the appreciation of the dollar against the backdrop of divergent monetary policies could "have a profound impact on the global economy."

Hell breaks loose

Hans Redeker, chief currency strategist at Morgan Stanley notes that the money borrowed by the emerging economies is often used for domestic investments, so the balance sheets of many companies could be negatively impacted. Redeker fears that the crisis symptoms could play off each other, posing the danger of a chain reaction: "The BIS warnings confirm what we’ve been saying for a long time: Hell could soon break loose in the emerging markets."

Already now, the appreciation of the dollar is one of the strongest rises in past decades. The Dollar Index, which measures the greenback against the world’s major currencies, has been at its highest since spring 2006. But it's not the absolute state of the index that is noteworthy. It is the speed of the appreciation.

Since the beginning of July, the dollar has gained 13% on the major trade currencies, which for the currency market is huge. Against the currencies of individual emerging markets, the greenback's rally has been even more dramatic. Since summer, appreciation against the ruble is over one-third. It's 15% against the Ukrainian hryvnia and Brazilian real and 7% against the Turkish lira.

For companies whose debt in is dollars, that means that in their own currency their burden of debt keeps rising. And there's another troubling accounting problem: Many emerging economies overwhelmingly take in the dollars they need through the sale of commodities that are traditionally billed in dollars.

In the past few months, the dollar price for most commodities has taken a sharp dive. That mainly applies to the plummeting oil market, where prices have dropped some 40% since the summer, which is great for resource-needy industrial nations but poses an increasing threat to producers.

Dollar history lessons

Nearly one-fifth of the companies in the MSCI Emerging Markets Index are in oil-exporting nations. In the MSCI Frontier Markets Index, a sub-index for particularly dynamic economies, that's 55%. Signs of a potentially looming calamity are already reflected in the value of local stock exchanges. Since July the Frontier Markets Index has dropped by 8%.

The regular Emerging Markets Index lost 6% during the same period. The stock exchanges in industrial countries mostly gained, including record highs on the Dax and Dow Jones.

In the past, dollar appreciation has unleashed crises in emerging economies. It happened in the early 1980s when a strong dollar led the South American countries into major trouble and in the mid-1990s when the Asian tiger countries fell like dominoes.

Today China alone is indebted to the tune of $1.1 trillion, although the world's second-largest economy has significant dollar reserves amounting to nearly $4 trillion. They act like a kind of protective shield against crises. Beijing learned its lesson when, during the Asia crisis of 1997-98, it saw one government after another fall because the countries couldn't pay their dollar debt and fell into recession.

Ghana was the first country that had to be rescued by the International Monetary Fund. Africa's one-time star pupil was nearly bankrupt from the slump of its currency, the cedi, and dollar debt exploded.

The Ghana stock exchange — Photo: Dieu-Donné Gameli

It's a repeat pattern in the emerging economies. The government and companies borrow money in foreign currencies, which means local currency shocks have a dramatic effect. In economic literature, this is the phenomenon called "original sin." With their dollars, the countries inherit virtually all the problems of Wall Street.

In other countries this protective shield is far thinner: At first glance, Russia shows impressive foreign currency reserves of $361 billion, but it's all relative because their foreign debt is nearly double that, at $678 billion.

Brazil has $375 billion in foreign currency reserves with bank and company debt abroad amounting to $468 billion. According to BIS statistics, 63% of international debt is in dollars, with only 19% in euros and 8% in British sterling. The yen plays hardly any role at all at 3%.

The dollar, in other words, is as dominant as ever — and now its outsized strength could become a problem for the whole world.

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Green

Ecological Angst In India, A Mining Dumpsite As Neighbor

Local villagers in western India have been forced to live with a mining waste site on the edge of town. What happens when you wake up one day and the giant mound of industrial waste has imploded?

The mining dumpsite is situated just outside of the Badi village in the coastal state of Gujarat

Sukanya Shantha

BADI — Last week, when the men and women from the Bharwad community in this small village in western India stepped out for their daily work to herd livestock, they were greeted with a strange sight.

The 20-meter-high small hill that had formed at the open-cast mining dumpsite had suddenly sunk. Unsure of the reason behind the sudden caving-in, they immediately informed other villagers. In no time, word had traveled far, even drawing the attention of environment specialists and activists from outside town.

This mining dumpsite situated less than 500 meters outside of the Badi village in the coastal state of Gujarat has been a matter of serious concern ever since the Gujarat Power Corporation Limited began lignite mining work here in early 2017. The power plant is run by the Power Gujarat State Electricity Corporation Limited, which was previously known as the Bhavnagar Energy Company Ltd.

Vasudev Gohil, a 43-year-old resident of Badi village says that though the dumping site is technically situated outside the village, locals must pass the area on a daily basis.


"We are constantly on tenterhooks and looking for danger signs," he says. Indeed, their state of alert is how the sudden change in the shape of the dumpsite was noticed in the first place.

Can you trust environmental officials?

For someone visiting the place for the first time, the changes may not stand out. "But we have lived all our lives here, we know every little detail of this village. And when a 150-meter-long stretch cave-in by over 25-30 feet, the change can't be overlooked," Gohil adds.

This is not the first time that the dumpsite has worried local residents. Last November, a large part of the flattened part of the dumpsite had developed deep cracks and several flat areas had suddenly got elevated. While the officials had attributed this significant elevation to the high pressure of water in the upper strata of soil in the region, environment experts had pointed to seismic activities. The change is evident even today, nearly a year since it happened.

It could have sunk because of the rain.

After the recent incident, when the villagers raised an alarm and sent a written complaint to the regional Gujarat Pollution Control Board, an official visit to the site was arranged, along with the district administration and the mining department.

The regional pollution board officer Bhavnagar, A.G. Oza, insists the changes "aren't worrisome" and attributes it to the weather.

"The area received heavy rain this time. It is possible that the soil could have sunk in because of the rain," he tells The Wire. The Board, he says, along with the mining department, is now trying to assess if the caving-in had any impact on the ground surface.

"We visited the site as soon as a complaint was made. Samples have already been sent to the laboratory and we will have a clear idea only once the reports are made available," Oza adds.

Women from the Surkha village have to travel several kilometers to find potable water

Sukanya Shantha/The Wire

A questionable claim

That the dumpsite had sunk in was noticeable for at least three days between October 1 and 3, but Rohit Prajapati of an environmental watchdog group Paryavaran Suraksha Samiti, noted that it was not the first time.

"This is the third time in four years that something so strange is happening. It is a disaster in the making and the authorities ought to examine the root cause of the problem," Prajapati says, adding that the department has repeatedly failed to properly address the issue.

He also contests the GPCB's claim that excess rain could lead to something so drastic. "Then why was similar impact not seen on other dumping sites in the region? One cannot arrive at conclusions for geological changes without a deeper study of them," he says. "It can have deadly implications."

Living in pollution

The villagers have also accused the GPCB of overlooking their complaint of water pollution which has rendered a large part of the land, most importantly, the gauchar or grazing land, useless.

"In the absence of a wall or a barrier, the pollutant has freely mixed with the water bodies here and has slowly started polluting both our soil and water," complains 23- year-old Nikul Kantharia.

He says ever since the mining project took off in the region, he, like most other villagers has been forced to take his livestock farther away to graze. "Nothing grows on the grazing land anymore and the grass closer to the dumpsite makes our cattle ill," Kantharia claims.

The mining work should have been stopped long ago

Prajapati and Bharat Jambucha, a well-known environmental activist and proponent of organic farming from the region, both point to blatant violations of environmental laws in the execution of mining work, with at least 12 violations cited by local officials. "But nothing happened after that. Mining work has continued without any hassles," Jambucha says. Among some glaring violations include the absence of a boundary wall around the dumping site and proper disposal of mining effluents.

The mining work has also continued without a most basic requirement – effluent treatment plant and sewage treatment plant at the mining site, Prajapati points out. "The mining work should have been stopped long ago. And the company should have been levied a heavy fine. But no such thing happened," he adds.

In some villages, the groundwater level has depleted over the past few years and villagers attribute it to the mining project. Women from Surkha village travel several kilometers outside for potable water. "This is new. Until five years ago, we had some water in the village and did not have to lug water every day," says Shilaben Kantharia.

The mine has affected the landscape around the villages

Sukanya Shantha/The Wire

Resisting lignite mining

The lignite mining project has a long history of resistance. Agricultural land, along with grazing land were acquired from the cluster of 12 adjoining villages in the coastal Ghogha taluka between 1994 and 1997. The locals estimate that villagers here lost anything between 40-100% of their land to the project. "We were paid a standard Rs 40,000 per bigha," Narendra, a local photographer, says.

The money, Narendra says, felt decent in 1994 but for those who had been dependent on this land, the years to come proved very challenging. "Several villagers have now taken a small patch of land in the neighboring villages on lease and are cultivating cotton and groundnut there," Narendra says.

They were dependent on others' land for work.

Bharat Jambucha says things get further complicated for the communities which were historically landless. "Most families belonging to the Dalit or other marginalized populations in the region never owned any land. They were dependent on others' land for work. Once villagers lost their land to the project, the landless were pushed out of the village," he adds. His organization, Prakrutik Kheti Juth, has been at the forefront, fighting for the rights of the villages affected in the lignite mining project.

In 2017, when the mining project finally took off, villagers from across 12 villages protested. The demonstration was disrupted after police used force and beat many protesters. More than 350 of them were booked for rioting.

The villagers, however, did not give up. Protests and hunger strikes have continued from time to time. A few villagers even sent a letter to the President of India threatening that they would commit suicide if the government did not return their land.

"We let them have our land for over 20 years," says Gohil.

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