Are Crises in Argentina and Turkey Harbinger of the Global Crash?
By: Arkadiusz Sieron
GoldSeek.com
Friday, 27 July 2018
Some emerging markets, Argentina and Turkey in particular, deal with the economic crises, while their currencies are continuing their collapse. The Fed Chair, Jerome Powell, has recently said that “the role of U.S. monetary policy is often exaggerated”. On the other hand, many analysts believe that the Fed’s tightening causes a dollar shortage and pushes emerging markets into trouble.
Indeed, there is something in it. We don’t have to invoke the Latin America debt crisis in the 1980s, it is enough to recall the taper tantrum from 2013, when the Fed’s tapering lead to the global panic, the spike in bond yields and the capital outflow from the emerging markets. So are the dramatic events in Turkey and Argentina (and other countries) a tip of the iceberg of a broader systemic crisis across the emerging markets?
Let’s see. Turkey runs currently one of the largest current account deficits in the world, so it relies heavily on capital inflows and foreign borrowing to fund itself. Due to the institutional decline, including the Erdogan’s dismantling of the rule of law and interference in the central bank’s activities leading to too easy monetary policy, the Turkish lira plunged, pushing the country into the debt crisis.
Argentina’s peso is also in free-fall, even thought the central bank hiked its interest rate to 40 percent. Inflation is 25 percent and might get worse. In turn, the government was forced to seek the aid from the IMF, a humiliating twist for a country that hates this organization. The chart below shows the depreciation of the both currencies against the U.S. dollar over the few last years.
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