Collapse of values, emergency intervention by central banks, a new round of tapering by the Fed. A thrilling week has come to an end for emerging markets. And the markets fear that the week's turbulence will turn into a disastrous avalanche, similar to the Asian one of 1997 which infected Latin America and Eastern Europe. Already last spring, the announcement of tapering had triggered a flight from emerging markets: the prospect of a crackdown on the expansive policy of the Fed and an increase in bond yields, triggered a flight from areas considered more risky by those capital that in recent years had flowed into emerging countries in search of higher yields (compared to those guaranteed by US government bonds, for example). And in these first months of 2014, tapering has come alive, albeit in a mini format. The reduction in stimulus from the Fed was ten billion two months ago and another ten in the week just ended. No gasp from Bernanke. Which in the decision of its latest Fomc has snubbed the emerging chaos.On the other hand, by statute, the Fed must only take into account what happens within the US borders. And in the States, the economy is showing signs of recovery with fourth-quarter GDP growing by 3,2 percent.
“The tapering issue was fine in May. To say that the emerging currencies have gone into crisis due to tapering is to be taken with a grain of salt”, Unicredit forex expert Roberto Mialich said at the beginning of the week at the Milanese conference on the 2014 outlook. all common factors. They have a deficit on external accounts, which are financed either with long-term investments or with a speculative portfolio. These enter en masse if all goes well but leave equally en masse if all goes wrong. Then there is the problem of political instability: all the countries that have problems with current accounts are also countries where you have to vote in political elections”.
Emerging people suffer from all over the globe. The fuse was lit in Argentina where the knots left unresolved by the government have come home to roost: very high inflation, collapse of central bank reserves and expansionary monetary policy in the face of deficits. In Buenos Aires, the government, having reversed the heterodox policy followed up to now, implemented a series of measures including the devaluation of the official exchange rate to 8 pesos per dollar. For analysts, however, these are "palliatives": an overall plan is needed that will also lead to a tightening of budget expenditure and a return of the country to the capital market, blocked since the default. President Kirchner accused "the banks" and "economic groups" of being responsible for the devaluation of the peso, recounting from Cuba - in a series of messages on Twitter - her meeting with Fidel Castro and her meeting with her Brazilian colleague Dilma Rousseff.
Several moves by central banks to counter the collapse of currencies and the flare up of inflation. In India, the cost of borrowing was increased by 0,25% to 8% for repos, the rate used by banks for commercial loans. The governor of the Indian central bank denounced the weakening of the currencies of rapidly developing countries to the advantage of Western economies. In South Africa, it was decided to tighten the cost of money to 5,5% from 5%, the first since June 2008, with the risk of weakening an economy hit by the slowdown in global demand and miners' strikes. Shock intervention in Turkey where political uncertainties from the Bosphorus tangentopoli have contributed to a vertical collapse of the Turkish lira to historic lows. The Turkish central bank raised its overnight rate to 12% from 7,75%.
In the chaos, currencies of countries that are not doing so badly have also been wiped out. “And it is necessary to be selective – said Mialich – the pressure on Poland is incomprehensible in light of the fundamentals. As well as about Mexico. I don't think there will be the snowball effect that we have seen on other occasions in the crises of emerging markets”. And the Eurozone seems to be flexing its muscles. “The euro/dollar has held up very well – noted Mialich – despite the fact that there have been several attempts to ambush the euro, from tapering, to Draghi's openings to new expansive moves. The Eurozone also has a moderate surplus on its external accounts and at the same time we estimate higher growth prospects. Today there are several factors that are holding back the descent and that make us think that a weakening below 1,30/1,40 is unthinkable”.
Economy Minister Fabrizio Saccomanni also reassured the Eurozone's stability. “We are following the evolution of the situation with great attention – he said – today the euro is an island of tranquility and this is not indifferent in the choices of international investors”. For Saccomanni it is precisely in these moments that we see "the importance of the euro shield for a country like Italy" which, not surprisingly, in recent days has recorded minimum rates on new issues of government bonds.
But the situation needs to be monitored. For the IMF "sustained financial turmoil in emerging countries could cause a further tightening of global financial conditions".
