Liquidity/Rollover Risk on US Assets? A Nightmare Hard Landing Scenario for the US $ and the US Bond Market..
One of the most typical and common features of currency and financial crises in emerging market economies is "liquidity" or "rollover" risk. If a country has a large amount of short term debt that is coming to maturity and investors are unwilling to roll over (refinance) such debt, then a liquidity or debt rollover crisis may occur. The debt coming to maturity is usually the foreign currency (or foreign currency-linked) debt of the government (as the infamous Mexican Tesobonos in 1994) or the short-term foreign currency liabilities of the banking system (as the $20 billion plus of short-term cross-border inter-bank lines in Korea in 1997). Similar liquidity or rollover crises (also referred to as roll-off crises as investors roll off rather than roll over their claims) have been observed in every emerging market economy crisis in the last decade (see Chapter two of my new book with Brad Setser).
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