What do Indonesia, India, Hong Kong, South Africa, Argentina, Brazil, Russia and even China have in common with the reasons behind Turkey's largely self-inflicted crisis? Nothing.
Yet investors, sell-side analysts and media have conspired to push those countries and others into the same bucket and we are once again confronted with the notion that the world is facing an impending economic crisis that will consume the entire emerging market (EM) complex.
The truth is plain: there are people out there who like nothing better than to create any basis for a market calamity. So here we go again.
Between them, market people and media have concocted and manipulated a series of reasons and false logic that support the idea that because Turkey's economic and political issues seem to be spiralling out of control, so, simultaneously, will those of all other countries with macroeconomic imbalances; and the world as we know it will end in a tidal wave of contagion leading to economic destruction in all emerging markets. It's patently ridiculous.
Alas, it is a common and well-rehearsed theme, and one that plays into the hands of dishonest rumour-mongers and predatory short-sellers; fanned and often conflated by a media all-consumed by a driving need to create salacious headlines and who take a pleasure (schadenfreude perhaps?) in describing the pain of current contagion and 'unveiling' future dominoes as staged transmission effects take hold.
To be clear, I am not saying the list of countries mentioned above and others don't share optical similarities. Some clearly do, such as reliance on short-term external debt inflows. The point I am making is more nuanced. Since the Turkey story took a turn for the worse during July, and in particular since the beginning of August, nothing has fundamentally changed in many of the countries suffering from contagion-related selling action.
Political risk, trade imbalances, current-account deficits, risks to inflation or employment, exposure to oil prices, susceptibility to quantitative tightening and higher rates in the US and Europe or to US-inspired trade wars, are broadly the same.
But there is a world of difference between those risks, imbalances or other pressures mushrooming, and sending economies spiralling into recession, balance-of-payment crises or multilateral bail-out territory; and (typically) short-term technical asset-price volatility caused by knee-jerk risk-aversion among spooked foreign investors seeking to head for the exits, herd-like, at the same time. Squeezing through the eye of a liquidity needle they go.
In parallel with Turkey cutting the total notional principle amount of currency swaps with foreign counterparties to reduce the latitude for short selling, this is what we have had: the Indian rupee sinking to below 70 to the US dollar at one point in the past week; Argentina raising benchmark rates to 45%; Indonesia raising its seven-day reverse repo, deposit and lending facility rates by a quarter point; the HKMA intervening in the FX market to try and reduce Hibor/dollar Libor differentials. All explained away on the back of domestic issues but look conveniently timed to quell the double-whammy impacts of Turkey-related news flow.
Aggressive market behaviour or actions to swerve potential impacts ignore the fact that while countries may sit under the EM umbrella, they typically do not share significant trade links, despite the emergence of bigger South-South trade flows in recent years. Macroeconomic management, policy and structural reform processes are different and at different stages; the formation and engagement of domestic institutional capital are at different stages; countries have their own degrees of political robustness, their own policy toolkits.
What's going on in Argentina, Brazil, Mexico, India, Indonesia, China, Russia and South Africa is idiosyncratic. It is certainly true that exposures to hot external debt flows at a time of rising dollar rates and a strong dollar had brought to the fore a set of generalised vulnerabilities; ditto exposure to US-inspired trade wars.
But before the Turkish Lira capitulated, there was no sense that global EM were under impending attack. Nothing that has happened since the USD/TRY blow-out which has fundamentally changed the situation. That certainly infers there are some phenomenal investment opportunities where punters can take advantage of depressed prices in some countries.
But what this also leads to are questions about what can and/or should be done to quell occasional bouts of irrational market volatility. I think some of the unsourced reporting and rumour thrown about by the media should probably be investigated to uncover any potential sinister third-party intent.
I do remain uncomfortable about the existence of predatory short-sellers launching attacks on weak currencies or vulnerable governments using self-fulfilling prophecy or wall-of-money reasoning and just because they can.
Financial markets are not there to undermine or destroy the economic defences of exposed countries and inflict pain on populations through job losses, corporate bankruptcies or a myriad of other consequences. Scarce government resources should not be squandered on supporting currencies or bond yields; they should be used to create economic prosperity.
Market participants are typically quick to be damning about short-term crisis prevention or mitigation tools, such as bans on sovereign debt or currency short selling. In truth, I have been a little ambivalent over the years about my attitude to the effectiveness of such tools, as well as perhaps more academic questions about curbs on activity vis-à-vis the conduct of free and open capital markets.
Over the years, restrictions on capital outflows have been used throughout the world to greater or lesser effect; and of course, restricting conditions on taking capital out may act as a restraint on capital going in in the first place. That said, in specific situations, particularly where rapid and disorderly outflows pose systemic risks, I think they may be the only option. Am I right?
