According to an article published today in the Wall Street Journal:
"Broadly, the thinking seems to be that emerging market economies brought their problems on themselves. By keeping their currencies undervalued in the aftermath of the global financial meltdown of 2008, even as their own economies performed robustly, they triggered massive hot-money inflows. The scale of these inflows is reflected in very large current-account deficits. The International Monetary Fund forecasts that Brazil will have a shortfall equivalent to 2.4% of GDP this year, after running surpluses before the financial crisis. Indonesia has swung to a deficit of 3.3% of GDP this year from a surplus of 2.7% in 2006. India’s deficit is seen at 5% of GDP, South Africa’s at 6.4% and Turkey’s at a whopping 6.8%.
Policymakers in these economies are just as quick to blame developed market central bankers for their woes. There was very little they could do in the face of the massive flood of liquidity pumped into financial markets by the European Central Bank, Bank of Japan, Bank of England and, especially, the Federal Reserve. Little, that is, short of allowing their currencies to appreciate so high and so fast, or tightening domestic fiscal or monetary policy so hard, that their economies would have been driven into a severe
downturn.
"Broadly, the thinking seems to be that emerging market economies brought their problems on themselves. By keeping their currencies undervalued in the aftermath of the global financial meltdown of 2008, even as their own economies performed robustly, they triggered massive hot-money inflows. The scale of these inflows is reflected in very large current-account deficits. The International Monetary Fund forecasts that Brazil will have a shortfall equivalent to 2.4% of GDP this year, after running surpluses before the financial crisis. Indonesia has swung to a deficit of 3.3% of GDP this year from a surplus of 2.7% in 2006. India’s deficit is seen at 5% of GDP, South Africa’s at 6.4% and Turkey’s at a whopping 6.8%.
Policymakers in these economies are just as quick to blame developed market central bankers for their woes. There was very little they could do in the face of the massive flood of liquidity pumped into financial markets by the European Central Bank, Bank of Japan, Bank of England and, especially, the Federal Reserve. Little, that is, short of allowing their currencies to appreciate so high and so fast, or tightening domestic fiscal or monetary policy so hard, that their economies would have been driven into a severe
downturn.
Wherever the responsibility for the recent mania for emerging markets happens to fall–on these countries or on developed economy central bankers–the end result was credit booms driven by hot-money inflows.
The problem with hot money is that as fast as it flows in one direction, the current can be even stronger in the other. As the1997 Asian crisis showed. Then too, hot money made for booming economies until investors got cold feet. The consequent crisis was crippling to a number of economies across the region.
But the pain didn’t end there. The 1997 Asian crisis was followed by the 1998 Russian crisis and together they combined to cause the spectacular collapse of Long-Term Capital Management.
What are the chances that some major developed-country bank, hedge fund or other financial institution is exposed to emerging markets in ways that perhaps even its risk officers aren’t completely aware of–be it through derivatives or counterparty deals with emerging market institutions that are themselves suffering serious problems. After all, that was one of the big lessons of 2008: no one’s really quite sure what their full exposures are until the dust settles".
