Some nations are the authors of their own misfortune

Some nations are the authors of their own misfortune

Internal problems make Argentina and Turkey ill-suited to cope with a stronger dollar

Emerging market woes add up to more than tariffs and fear of a trade war. Trade talk is unhelpful for vulnerable EMs, and the sharp rise of the US dollar since the spring, driven largely by the relative aggression of US monetary policy, has prompted capital to move back to the US. In the case of those countries most dependent on dollar-denominated debt, this has been the last straw.

But EMs can still be the authors of their own misfortune. Argentina and Turkey had both flared up as causes of concern earlier in the summer, and then ­managed to remove themselves from the headlines. But this week, the currencies of both nations have sunk back into extreme difficulties, even though — and this is very important — the news on trade has been positive, and the US dollar has weakened against its main trading partners.

In both cases, internal problems have made them ill suited to cope with the stronger dollar. But if they are the authors of their own misfortune, there is reason to doubt that they can now take control of their own recovery.

Argentina is the most painful example. President Mauricio Macri’s appeal to the IMF to speed up payment of funds to help combat the crisis merely undermined confidence. Now, its interest rates have risen to 60 per cent. The idea behind such a drastic move is to show the country’s iron-willed commitment to defending its currency. But as with the appeal to the IMF, it may well prove counterproductive.

The famous example of the UK’s “Black Wednesday” in 1992, when base rates were moved from 10 per cent to15 per cent in a matter of hours, shows the problem with this approach. Markets responded with disbelief that the government could go through with a measure that would be so painful for the economy. Pressure on sterling continued until the authorities gave up, rescinded the rate rises and permitted a devaluation.

In Argentina, no such pleasant outcome is available. Instead, investors contemplate the likely political repercussions of the crisis. A presidential election is being held next year, and no president would find it easy to gain re-election with interest rates at 60 per cent. The most likely alternative is likely to be unpalatable to markets.

Turkey, whose president is already unpopular with investors, is seeing a similar cascade of confidence. At this point, the risk is evident that it is too late for shifts of policy in the developed markets to help either country.

Neither Turkey nor Argentina is big enough on its own to cause significant damage to economic growth elsewhere. But we should expect the pressure on the Federal Reserve to intensify. Higher US rates would intensify the pressure on other developing economies, until they would indeed carry a risk to the global economy as a whole.

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