After the 2008 crisis, there was a brief period of cooperation between G20 monetary authorities. Emerging markets supported the Federal Reserve’s extraordinary policy, and as a result experienced capital inflows leading to inflationary pressures and currency appreciation. This has in some cases been aggravated by poor domestic policy. But it isn’t good enough to argue that emerging markets should have protected themselves from Fed policy, and that any problems they have are due to bad policy on their part. Because financial markets operate across borders, it is very difficult for emerging market central banks to protect their economies from sudden reversal of capital flows. The US benefited from the agreement of the G20 to QE, and continues to benefit from the dollar’s reserve currency status – with this “exorbitant privilege” goes exorbitant responsibility. Fed policy should take account of its global effects. Frances Coppola is a former banker. She blogs at: coppolacomment.blogspot.co.uk.
Although tapering certainly triggered the emerging market chaos, it’s the underlying state of economies like India and Turkey that has led to the sustained sell-off we are seeing. The global flood of liquidity flowing from central banks caused all assets to rise on the same tide, leading to a blind hunt for yield as investors looked for a pick-up relative to the very low rates available in developed markets. When talk of a taper began, it reminded the market that global liquidity would eventually begin to ebb; as Warren Buffet says: “Only when the tide goes out do you discover who’s been swimming naked.” The turmoil was focused on the most vulnerable currencies – those with high current account deficits and large external funding requirements – but contagion has now spread, and we are seeing broad-based selling. That said, emerging market differentiation is likely to return when the panic eases, and countries like India and Turkey will still look vulnerable. Christian Lawrence is emerging markets strategist at Rabobank.