In the runup to the global financial crisis, George Magnus, who was then chief economist at UBS, was one of the most insightful commentators and was early to call how bad things might get. He’s best known for coining the term “Minsky moment” in early 2007, which he described as when “lenders become increasingly cautious or restrictive, and when it isn’t only over-leveraged structures that encounter financing difficulties . . The risks of systemic economic contraction and asset depreciation become all too vivid.”
Magnus returns and does not find much reason to be optimistic. In a comment today at the Financial Times, he discusses Turkey’s economic and political situation in some detail, and then discusses the potential for continued, widespread upheaval:
It is true that many emerging markets look stronger today than in the 1990s – they have larger currency reserves and better financial governance. At the same time they are also more vulnerable to shocks. They have lifted their share of global GDP from 40 per cent in 1997 to almost 55 per cent (on a purchasing power parity basis); now more than ever, the impact of a slowdown will be felt around the world. Most emerging economies are sustained by western export markets rather than local demand. This is a strategy that has passed its sell-by date.
Dependency on capital inflows, especially to finance rising local currency borrowing, makes these economies vulnerable to changing conditions in overseas markets. Credit cycles in China, Brazil and other countries are peaking. Commodity prices are falling from record highs….
Just as China’s ascendancy had dramatic positive consequences for emerging markets, so its slowdown can be expected to have opposite effects. The challenge of pursuing important economic reforms without eroding the power of the Communist party, and of trying to slow down fast and often weakly regulated credit creation, are China’s principal concerns now. Rising bond yields, illiquidity and instability in financial markets are the early signs.
The current crisis in emerging markets is still viewed by many as being just about Turkey. But the tequila crisis in 1994 was initially about only Mexico, the Asia crisis in 1997 about Thailand and the financial crisis of 2007-08 about US subprime lending. A crisis must make landfall somewhere. But the effects of the current storm will be felt beyond Turkey’s borders.
Magnus elaborates on some of these ideas in an interview on the RT show Boom and Bust, starting at 4:15. One of his clear and consistent messages is that the slowdown in China and efforts to constrain the shadow banking market are much bigger shocks for emerging economies than the Fed’s taper.