Is Another Emerging Markets Crisis in Motion?

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…

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  1. Anonymous

    I imagine China probably has some extra USD lying around. Might be a good way to prop up there egos and cred as the savior (again) of Asia/EM economies.

  2. Richard Kline

    Virtually every large industrialized economy has maintained negative _real_ interest rates through the last five years. Many have done so on an off for ten years. Only some have allowed profligate credit creation, but the US has done so notably. Let’s be clear: the dollar and debt denominated in it are only the media for a global financial instability. Every major economy caught the ‘American disease,’ the feverish delusion that unchecked macroeconomic stimulus, if ‘properly managed,’ would make for endless prosperity with no side effects. Side effects are certain; prosperity cannot exceed its inputs such as commodity supply and productivity; hence, there is no ‘proper management’ of such an approach. The world has tried to collectively lift itself up by its Rolex bands, and no the global citizenry is in the downswing of a poorly executed backflip headed face first into the pavement. Everybody tried to steal a march on the others with a hypodermic full of stimulus; we ‘fixed’ our growth together, and now we get to come down together.

    We in the US bear the largest share of responsibility since this crisis would have been much smaller and very different if we had opposed the vectors just mentioned rather than exponentiated them; there is blame enough to go around. And the worst part, to me, is that public financial authorities in most large economies _still_ do not get it that they cannot collectively stimulate their way out of pain. There is too much of the belief that we don’t need to clean up the mess, or redesign our macroeconomic strategies but that we can presumably just give ourselves a ‘methadone level’ of stimulus and pull through with no more than nigh sweats and occasional asset vomiting. That’s not gonna happen.

    We need a real rethink of macroeconomic grow policies in the interlinked market economies of the globe. Where capital knows few borders and everyone competes for the same commodities beyond what they have in-country, fleece thy neighbor leaves all poorer. We can (perhaps) cooperate and get modest but stable growth if with our present extremes of wealth rather less salient, or we can compete against each other and generate intermittent overshoot cascades. The idea that everyone can be above average in wealth is an express ticket tot he kind of crash we now have.

    The upshot of THAT contention, friends, is that it is in the interest of the rest of the world for the US to become, and remain, relatively much less affluent than the manner to which we have become accustomed. Fighting a war to that effect would be stupid, perilous, and unnecessary. They should just charge us more for the money the lend us, and somewhat more for the goods they sell us. Their macroeconomic strategies are not so configured, there’s the rub, and they take a loss on conversion. They’re pushing dimebags and we’re shooting a couple a day, but if they stop selling junk and start selling oranges and solid state electronics they live it lean while we rehab. Oh well: Those who don’t believe in evolution are doomed to repeat it.

  3. Richard Kline

    I should add that a global economic downswing is not at all equivalent to global mono-cyclical oscillatory structure. It is just the case that due to economic interlinkage and the stupendous scale of knock-on effects, everyone takes a hit regardless of the phase state of their respective oscillatory vectors. This was what happened in the 1930s, for example. Even locations which were, in fact, in what amounted to an upswing so to speak took a hard knock when global trade and overall money supplies contracted sharply. Economic flows are in fact _a very poor data context_ in which to examine cyclicality exactly because inter-population effects are so extensive for economic behaviors.

  4. baychev

    china has very low USD stock, most of their USD holdings are in treasuries.

    consider this: the EU surpassed the US as china’s biggest trade partner. in face of declining EU exports to the US/Asia, their demand for chinese goods is going to decrease. add to that the slump of already 20% of the EURUSD and chose imports become quite pricy as well further depressing demand.
    i personally expect serious contraction of chinese exports, and you guys that are living there can give us a better picture of the dependency of the economy to exports. as per Jeremy Grantham, 37% of the GDP composition is exports. i dont see how a hit of at least 3% to GDP attributable to exports can be avoided and its related chain effects on investment (another 37% of GDP) and consumption.

  5. mxq

    I wonder if the dollar shortage is why the fed is offering its bazillion dollar swap facility.

    Which actually reminds me of a joke…

    “Donald Rumsfeld is giving the president his daily briefing. He concludes by saying: “Yesterday, 3 Brazilian soldiers were killed.”

    “OH NO!” the President exclaims. “That’s terrible!”

    His staff sits stunned at this display of emotion, nervously watching as the President sits, head in hands.

    Finally, the President looks up and asks, “How many is a brazillion?”

    boo! hiss!

  6. john bougearel


    Funny you should parallel EM’s of today with that of problems with the ASian and Russian EM’s in 1997-1998.

    Back then,the final bear market decline in crude oil was 62% to zero when it bottomed near $10.

    I happen to do a bit of technical analysis (a chronic hobby of mine) and noted that a 62% correction from $147 targets a $5-%56. That would take Crude oil back to its Hurricane Ivan high in Oct 2004.

    $55 appears to be the next big support area above the 2007 low at $50.

    That implies about another 20% downside risks near term which seems quite doable given the 12% crude oil demand destruction you noted in your recent oil post. The downside risks are further strengthened by the fact that that demand destruction continues to accelerate i.e. the gap between peak demand and today’s diminishing demand.

    the only way to capture US dollars for alot of EM’s in Russia, Brazil, and other latin american countries are hurting for certain.

    Risks of defaults in these countries are escalating as we speak and write

  7. john bougearel

    the only way to capture US dollars for alot of these EM’s are through crude oil exports. Countries reliant on Crude oil exports and are starving for dollars will be hurtin for certain.

    (sorry to have to rewrite that, must have been distracted by the credit rating agency testimonies)

  8. Anonymous

    Does this mean these holders of US debt start selling treasuries to raise dollars?

    Now that would be fun ;)

  9. Anonymous

    Or they could just stop buying the trillions of new debt the US Treasury plans to issue for all the bailouts…..

  10. James Kwak

    It’s a good thing that the emerging markets crisis is getting some attention – it’s been very easy for people in the G7 to ignore it because of our own problems. For more on the topic, my co-authors wrote an op-ed in a week and a half ago ( We also do periodic updates on our blog (, although I’ve been remiss about doing one in the last few days.

  11. Richard Kline

    So John Bougearel, feel free to quote away. I consider anything I place here public domain. But please, fix my typos. (I do worse neurologically some days than others.) I’m willing to look like a fool on content where I’m wrong, but I’d prefer to look less of a fool on execution than I often achieve under my own power.

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