As the US Federal Reserve tapers QE and interest rates rise, there are reasons not to fear a repeat of the Asian crisis
Brazil last week became the latest country to take emergency action to shore up its currency as anxious investors piled out of emerging markets. India, Indonesia, Turkey: there was more than a whiff of panic in the air as policymakers tried to reassure financial markets they remain a good bet.
The Brazilian real has lost 20% of its value against the dollar since the start of the year, the rupee is down 15% and the Turkish lira down 10%. The situation has alarming echoes of the catastrophic Asian financial crisis of 1997-98. Back then, Thailand became the first of the fast-growing "Asian tigers" forced to turn to the International Monetary Fund (IMF), as foreign investors lost heart and left and its currency plunged, sparking a chain reaction that spread across much of the continent.
This time the looming crisis has been caused by a change of heart by the Federal Reserve, thousands of miles away in Washington. In 1997, it was Alan Greenspan's decision to push up US interest rates that sparked investors to pull their cash out of riskier markets to take advantage of better returns back home. This time, it's the stated intention of Ben Bernanke, the chairman of the Fed's board of governors, to start"tapering" its unprecedented $85bn a month programme of quantitative easing (QE), perhaps as soon as next month.
Under QE, the Federal Reserve hoovers up assets, mainly US government bonds or US treasury notes in a bid to push up their prices, which helps to reduce interest rates across the economy and create the conditions for recovery. But a side-effect of the policy is that banks and other investors use the cheap cash to go on a global shopping spree, looking for tempting investment prospects from Rio de Janeiro to Jakarta.
When the money is flooding in, inflating share prices and driving down the cost of government borrowing, it's easy for politicians in emerging economies to believe their own hype - political stability, the rising middle class, a large and growing workforce, huge untapped potential. But when the tide turns, they can suddenly become acutely vulnerable.
There are several reasons to be optimistic that we're not heading for a repeat of the Asian crisis. Many of the countries involved have piled up vast stockpiles of foreign currency reserves in the past 15 years in a deliberate bid to avoid being forced into the hands of the IMF. Few are reliant on the foreign-currency denominated loans that were a particular problem back then, and the Federal Reserve is acutely aware of the risk of sparking a new global financial crisis.
But while Central bankers have always known that the scale of the so-called "unconventional measures" that they unleashed on the world since the Great Crash of 1929 was unprecedented, they have no idea what the consequences will be as they start to unwind them. Just about every country that's been wooed by Wall Street over the past five years has good reason to be afraid.
Article Source : http://www.guardian.co.uk
Azure Global’s vision is to be widely recognized as a reputed firm of financial business advisors, achieving real growth for ambitious companies and to become the first choice for F&A outsourcing for accountancy practices and businesses alike and if u want to Setup ur business in United Kingdom then its not difficult in this modern age for more info visit our site Azure Global and join us also On Facebook
