Aug 26, 2013

    Risk of new financial crisis overblown

    PLUNGING emerging-market currencies amid the prospect of the United States' stimulus tapering have stirred memories of the 1997 Asian financial crisis, but analysts doubt a similar catastrophe is in the making.

    "There are negative linkages (now), but I don't think that we are in a repetition of the 1990s crisis," said Mr Jean Medecin, a member of the investment committee at asset manager Carmignac Gestion.

    While the Indian rupee has so far taken the worst beating, falling nearly 15 per cent against the US dollar over the past three months, Indonesia's rupiah and the Brazilian real are down 10 per cent, and the Turkish lira over 5 per cent, in a trend that is frightfully reminiscent of the crisis that began in Thailand in mid-1997.

    Back then, investors reacted by panicking, withdrawing funds en masse, resulting in the Thai baht eventually collapsing. The phenomenon then spread like wildfire throughout Asia, and even to Russia.

    Short of capital, emerging countries suffered acute shortages of credit, plunging them even deeper into crisis.

    Fifteen years on, emerging countries are now much better equipped, said Indian Prime Minister Manmohan Singh last week.

    In 1991, India had only 15 days' worth of foreign-exchange reserves. "Now, we have reserves of six to seven months," he said.

    This week, Nobel prize-winning economist Paul Krugman wrote on his New York Times blog that, in retrospect, the flood of money into emerging markets looked like a bubble.

    But he added that "for the moment, I don't see a good reason to believe that the bursting of this particular bubble will be catastrophic".

    Ratings agency Standard & Poor's agreed.

    In a report, it called the capital outflows "disruptive, not destructive", and said most Asian developing nations will "weather the disruption without a sharp slowdown in economic growth or prolonged financial volatility".

    The Economist's Ryan Avent wrote on his blog that a bigger concern are potential policy errors on the part of governments and central banks as they try to stem the slide in their currencies.

    "Recklessly imposed capital controls could fuel panic and impair long-run growth," he said.

    The end of US monetary stimulus "risks squeezing demand around the world" when its purpose was to prop it up in rich countries.

    Ratings agency Fitch said recent developments have not prompted it to revise ratings.