Top economist warns of repeat taper tantrum

 
Chris Papadopoullos
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IMF chief Christine Lagarde said a US rate rise could spark another episode
International Monetary Fund chief Christine Lagarde yesterday warned that emerging markets were at risk of another taper tantrum if the US opted to hike interest rates this year.

Taper tantrum is a term that was coined to describe the mild financial market panic that ensued when the then Federal Reserve chairman Ben Bernanke said the pace of an asset purchase programme would be slowed.

“We already got a taste of it during the “taper tantrum” episode in May and June of 2013, when most emerging market economies suffered indiscriminate capital outflows,” Lagarde said at a speech in India.

“I am afraid this may not be a one-off episode...because the timing of interest rate lift-off and the pace of subsequent rate increases can still surprise markets.”

The prospect of an interest rate hike was not the only concern of hers.

“The appreciation of the US dollar is also putting pressure on balance sheets of banks, firms, and households that borrow in dollars but have assets or earnings in other currencies.”

Lagarde warned that “temporary—though aggressive—domestic liquidity support to certain sectors or markets may be necessary, along with targeted foreign exchange interventions.”

According to economist Shweta Singh from consultancy Lombard Street Research, the countries most exposed to dollar debt are Brazil, Chile, Indonesia. But Singh disagrees with Lagarde’s prognosis.

“A stronger US dollar and potentially higher US real rates will continue to exert pressure on emerging markets. But the sell-off is unlikely to be as severe as during the taper tantrums. A lot of adjustments have already been made across emerging markets, albeit to varying degrees,” Singh told City A.M.

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