Exporting the taper
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The minutes from the Fed’s Open Market Committee are out, revealing little except the fact that members are “broadly comfortable” with the plan to start tapering quantitative easing later this year. While the economic implications for the US have been discussed to death, the focus now seems to have shifted to the effects QE tapering will have on the rest of the world.
All emerging market problems, it seems, have been blamed on the taper. Reuters reported Tuesday that “the Indian rupee fell to a record low, Indonesian markets tumbled and Turkey raised a key interest rate to halt a slide in its currency as turmoil in emerging markets deepened on Tuesday in anticipation of reduced U.S. monetary stimulus”.
Economic consultant Tim Lee told the NYT that the world’s in the midst of a “Bernanke bubble”. Free Exchange has a good overview of the problem, but basically low interest rates in the US have allowed emerging markets to borrow cheaply. Now, however, companies and governments that borrowed in dollars but bring in most of their revenue in the local currency have a problem after their currencies have started to weaken. So far, the list of countries this problem include: Turkey, Brazil (which has made Ben Bernanke aware of its displeasure over QE for at least a year), Indonesia, Malaysia, China, and India.
This issue is particularly acute in India, which has a relatively high government debt burden. Larry Elliott writes that “India’s financial woes are rapidly approaching the critical stage”. Matt Phillips points to the Indian central bank as one of the problems — first it was trying to suck rupees out of the system, but now it has reversed course and announced an 80 billion rupee government bond-buying program. The WSJ explains that India “relies on huge energy imports to fuel its economy. Investment has ground to a halt because of the government’s failure to push through clear rules meant to open up sectors like retail and aviation to foreigners”. Meanwhile, India’s corporate debt is at its highest level in over a decade.
James Saft points out that this sort of credit crunch has happened before: in Latin America in the 1980s and in Asia in the 1990s. Still, he says, lessons learned in both those instances might help the world avoid crisis this time. India has large reserves of foreign currencies (more than $270 billion), and more broadly, the IMF “has become more pragmatic” in dealing with similar situations. However, a solution relying on the IMF’s pragmatism isn’t necessarily comforting. — Shane Ferro
On to today’s links: