There is an eerie air of calm in Asian markets. After years of easy money, much of which found its way into Asia, the U.S. Federal Reserve is finally applying the brakes. Investors seem to be cheering the prospects of higher dollar interest rates. Financial markets barely responded when America's central bank tightened policy again on March 15, the second time in four months, and promised more to come this year. Perhaps that is because Asian export data has been more reassuring of late. Or perhaps it is because China has bounced back from its earlier growth stumble. Whatever the reason, few seem to appreciate the risk Fed tightening poses to Asia.
Here is the issue: Debt. Since 2008, the region has splurged on it. And for good reason: Balance sheets, at least initially, were lean, and export markets in the West had faltered. What better way to sustain growth than leverage up and invest locally. The recipe worked, possibly better than many had imagined at the time. Growth continued to soar in Asia's emerging markets even as much of the world struggled to recover from recession. And it was all financed at record-low interest rates.
