Warren Buffett’s magisterial dictum about the aftermath of financial booms has now become conventional wisdom: only when the tide has receded can you see who has been swimming naked.

In the case of emerging market countries who have spent years wallowing in cheap money, however, the issue is complicated by the changing identity of the bathers in the water.

Traditional debt busts in emerging markets, from the Latin American crisis of the 1980s to the Asian financial turmoil of the late 1990s, generally used to be centred on sovereign bonds, usually contracted in dollars and often linked to the collapse of a currency peg. But the build-up of debt in emerging markets over the past decade has been disproportionately concentrated in the corporate sector , often in local currency. Total private sector debt in emerging markets is now equal to more than 100 per cent of annual gross domestic product, higher even than it was in developed economies on the brink of the global financial crisis in 2008.

In fact the problem may be even bigger, given that data on private sector emerging market debt are imperfect. Some of the cheap money created by the US Federal Reserve’s quantitative easing that found its way to emerging markets came via the “shadow banking” system, where flows are harder to record. Many emerging markets have also borrowed from China’s opaque development banks to a substantial but unknown degree.

The classic emerging market crisis ends with a sudden shock and a severe economic adjustment — often including a debt writedown — that clears the way for countries to grow again. The risk today, particularly in countries such as China with deep-pocketed governments, is of a different denouement: a series of partial short-term fixes via state interventions such as bailouts and regulatory forbearance to keep the show on the road. This risks the kind of prolonged malaise that afflicted Japan after the bursting of the 1980s bubble: banks weakened by bad loans clogging up their balance sheets; failing companies kept afloat; excess industrial capacity creating gluts and threatening chronic deflation.

It is easy to see why the Chinese and other authorities might prefer avoiding the debt nettle to grasping it. Although falling short of the official growth target would undoubtedly weaken Beijing’s credibility, a full-blown debt crisis and recession, with swaths of banks and companies going bust, would have more severe political consequences.

It is already evident from China’s management of its exchange rate — and more generally its painful transition from an export-oriented manufacturing model to a domestic demand-driven service economy — that Beijing has a habit of trying to make large moves in a series of small steps, reversing them to avoid short-term dislocations. It would hardly be a surprise if that mode of behaviour were to emerge again in the face of a debt crunch. If it did, long-term growth prospects for China and emerging markets as a whole would suffer.

The euphoria surrounding emerging markets as an asset class started before the global financial crisis and was rapidly resurrected afterwards. That excessive enthusiasm has now, fortunately, very largely dissipated. But it was in place long enough to create a misallocation of capital that could take several years and many billions of dollars of losses to sort out.

Many emerging market policymakers have a difficult and uncertain future. They can start by recognising that they are facing a potentially very serious problem. The easy good times have gone; the hard work lies ahead.