Amid much talk at the current World Economic Forum at Davos, in Switzerland, of a broad return to economic growth, the world’s emerging economies have suddenly found themselves confronted with a massive drain of capital which, over the past few days, has seen money markets shaken by what is nothing short of a major seism.
The movements of capital are not only affecting those countries which are encountering significant economic and political difficulties, such a Argentina, Turkey and Thailand, but also others supposedly less exposed, including Russia, Brazil and South Africa.
Over the space of 48 hours last week, the Russian ruble fell to its lowest value in five years and the South African rand dropped to its lowest against the dollar since 2008. Meanwhile, the Turkish lira lost 10% of its value in just ten days.
International monetary authorities fear that the movement may accelerate and cause a destabilization of the whole monetary system, and panic is now replacing recent euphoria. For a slide has begun which is seeing withdrawals of capital, whatever the situation and whatever the price paid, to escape the eventual greater losses that could lie ahead.
Over a period of two and a half years, financiers of all sorts have placed impressive amounts of capital in emerging countries, sums obtained for relatively little from Western banks, in order to profit from the high rates on offer. All of them were confident of a rosy future for the emerging economies. But over just a few days, the same financiers are now torching what they once placed so much faith in. Suddenly, social tensions in South Africa have made it a less certain a prospect, while Brazil’s slowing growth has made it a less promising investment, and so on.
The financiers also argue that they are acting ahead of both the perspective of a fall in the unconventional aid from the US Federal Reserve (which has a monthly 85 billion-dollar stimulus package) and a rise in interest rates among Western economies. While none of this has yet happened, the mantra from analysts is that the markets are acting in anticipation.
In a report published earlier this month, the International Monetary Fund insisted on the danger of destabilization for the emerging economies in the event of a sudden drain of capital. The same outflow movement of capital was witnessed last May immediately after the announcement by the Federal reserve that it would progressively reduce its quantitative easing programme.
In face of the worldwide turbulence that followed that announcement, the Federal Reserve decided against any significant reduction in its stimulus package, taking great care that no-one would be taken by surprise by any future downward changes. That move was imitated by the European Central Bank and the Bank of England, who both decided to avoid surprising the money markets by announcing future policies well ahead.
However, these attempts at coordinating action by the central banks have clearly not succeeded in preventing the massive movements of capital that they so feared. The financiers, meanwhile, are likely to obtain satisfaction. For the central banks, terrified by the prospect of a destabilization of the whole of the monetary system, are unlikely to reduce at anytime soon their almost free-of-charge distribution of money, to which the world of finance has become so addicted.
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English version by Graham Tearse