Troubles in Argentina and Turkey are the next stage in the fallout from the crash of 2008by Paul Wallace / September 6, 2018 / Leave a comment
One reason why the financial crisis that came to a head a decade ago, with the collapse of Lehman Brothers, blindsided Wall Street and the City was that crises were not supposed to happen in advanced economies with sophisticated financial systems. Instead their preferred habitat was emerging markets, notably in Latin America in the early 1980s and Asia in the late 1990s.
Now another crisis is taking hold in that more familiar domain. The emerging markets most afflicted up to now—Argentina and Turkey—are particularly vulnerable because of deep flaws, past and present, in their economies and politics. But the main cause of the distress lies elsewhere, in the United States, as the Fed tightens monetary policy, sucking in funds from around the world and strengthening the dollar.
That is why countries as diverse as Indonesia and South Africa are also under pressure as their currencies lurch down in value. The Indonesian rupiah is trading at its lowest against the dollar since the Asian crisis two decades ago. The South African rand has fallen by a fifth against the dollar this year, a further headache as the economy slides into its first recession for almost a decade.
For much of August Turkey was in the firing line as the lira tumbled, falling one day by 14 per cent against the dollar and now over 40 per cent down from the start of the year. In common with all currency crises, there were domestic as well as wider international reasons. As President Recep Tayyip Erdogan has steadily strengthened his political grip on the country, he has forfeited the confidence of international investors anxious about Turkey’s ability to finance its big current-account deficit, which was 5.5 per cent of GDP last year. That left Turkey vulnerable to an escalating dispute with America over its detention of Andrew Brunson, an American evangelical preacher, which prompted President Trump to double tariffs on Turkish steel and aluminium last month.
“As the Fed tightens monetary policy, it is sucking in funds from around the world”
Erdogan’s bizarre characterisation of interest rates as the “mother and father of all evil” is a black mark for a country that urgently needs to raise them. Another worrying sign is the appointment of his son-in-law, Berat Albayrak, as finance minister in July.…