We mentioned earlier, focusing on a comment made in Brad Setser’s post “Where is My Swap Line?” that emerging economies had not internalized the lessons of the 1997 Asian crisis as much as was widely believed. Their central banks if anything overreacted, keeping their currencies cheap against the dollar and amassing large foreign currency reserves so that they would not be in the position of needing to defend a high-flying currency and lacking the firepower.
But their banks were not so hyper-cautious. They borrowed heavily in international markets, and the recent rise in the dollar, combined with high cost and scarcity of dollar funding, is squeezing them badly. As Setser noted then:
Analysts said emerging market currencies were being hit as foreign investors pulled money out of developing regions, driven by liquidity pressures from the credit crisis. “There seems little now that the authorities can do to reverse the process of deleveraging that is taking place with financial institutions all contracting their balance sheets at the same time,” said Derek Halpenny, at Bank of Tokyo-Mitsubishi.
Hungary is scrambling for euros.
Ukraine’s government is scrambling for dollars and euros – both to back its currency and to cover the maturing foreign currency borrowing of its banks.
Pakistan’s government needs dollars.
Korean banks are scrambling for dollars.
As are Russian banks. And Kazakh banks. And Emirati banks.
In many of the oil exporters, the government was building up foreign currency assets (reserves, sovereign wealth funds) while the private sector (including many firms with close ties to the government) were big borrowers from the international banking system. In the Emirates there is an added complication: Abu Dhabi was the emirate building up its external assets, while Dubai was the emirate doing the most borrowing.
But across the emerging world, external bank loans have dried up – creating a scramble for foreign currency liquidity.
Today’s FT Alphaville provides further confirmation that we may be in a slow-motion re-run of the Asian crisis:
This is from Sean Corrigan, chief investment strategist at Diapason Commodities Management.
Public sector surpluses in many [emerging markets’ have masked the fact that the private sector there has (a) acquired long term (unsaleable) USD assets with S-T USD funds which it cannot now readily access and (b) that far too many of the firms and individuals whoe were so effortlessly earning those dollars via exports have geared up further to take advantage of what looked like the one-way bet of a falling greenback borrowable at negative real interest rates…
Now this has all fallen apart, we now have a severe squeeze developing in parts of Asia, most of Latam, and all across E Europe and the FSU…
We seem to be adding a slow burning 1997-01 EM crisis on top of our Western woes… and, so far, there has been no concerted CB move to provide these people with the dollars they need, unlike in the developed nations….
Given that many are also reliant on commodity earnings this can’t help either, for this adds to their overreliance on bankrupt Western consumers and on widespread capital expansion in a booming world for their higher order goods sectors…