Financial Zud

A Mongolian term for the economic downturn.

“Waves from the global economic downturn hit Sodnomdarjaa Khaltarkhuu when bank officials showed up at his tent on the edge of the Gobi desert and threatened to foreclose on his goats, sheep and camels,” Gordon Faircloughreported for The Wall Street Journal from Tsogt, Mongolia.

Falling demand for cashmere among recession-hit shoppers in the West is cutting into earnings among nomadic herders in Mongolia, whose goats produce the soft fiber used in high-end sweaters, scarves and coats. The result: herder loan defaults.

Mongolians are calling the current situation a financial zud, invoking a local term for unusually harsh winters that devastate herds. After Mr. Sodnomdarjaa couldn’t pay back a $2,700 loan, he says bank officials pressed him to sell his livestock – which he used as collateral. The bank says he misrepresented the number of animals he owned, which he denies. Now a judge has ordered the seizure of Mr. Sodnomdarjaa’s family home – a tent – if he doesn’t come up with the rest of the money soon.

Fairclough observed,

The credit crisis on the steppe has root causes similar to those of the subprime mess in the U.S. Some herders, betting on continued strong cashmere prices, borrowed more than they should have, and spent the money on the Mongolian equivalent of conspicuous consumption: motorbikes and solar panels to provide electricity for their tents. Banks, looking to cash in on rural prosperity in the good years, didn’t pay enough attention to risk management and lent too freely, some bankers say.

Fairclough explained that Mogoloian herders “typically earn significant cash just twice a year – in the spring through cashmere and wool sales, and in the autumn through sales of animal skins and meat.” Loans from commercial banks helped the herders to negotiate the months in between.

(More than a quarter of Mongolians earn their living from livestock. The price of animals, meat and skins has halved in some areas since the start of the downturn. In early April, Reuters reported that cashmere prices had dropped 40 percent.)