The article from the Financial Times is as follows:
The currencies of Turkey, Brazil, South Africa, India
and Russia all tumbled in value yesterday after a shock slump in the Argentine
peso highlighted the challenges that emerging markets face in a world hit by US
monetary tapering and easing Chinese growth.
The emerging markets turmoil also triggered a global sell-off in riskier assets and a rush into safer bond markets. European shares, seen as having a higher risk premium than bonds, were hit, and the FTSE Eurofirst 300 index fell 2.4 per cent – its biggest one-day drop since June last year. Germany’s Dax index dropped 2.5 per cent.
Argentina attempted yesterday to shore up confidence. Jorge Capitanich, cabinet chief, announced a minor relaxation in capital controls, allowing from next week Argentines to buy US dollars with savings and reducing tax on such purchases.
But on the streets of Buenos Aires, there was anger over what many see as economic policy on the hoof. “This is all improvised. They don’t know what they are doing. Inflation is going to rise. I wish I could buy dollars but there is no purchasing power,” said Antonio Lopez, 63, as he bought a newspaper.
Traders sold currencies already weakened by months of depreciation. The peso fell 1.73 per cent to 8.02 to the US dollar by 5pm in London, following its 10 per cent fall on Thursday. The Turkish lira, Russian rouble, and Indian rupee all ended the day weaker, while the South African rand hit a five-year low. The peso is down 15.06 per cent on the week and the S&P 500 by 3 per cent.
Although Argentina’s woes were a catalyst, the causes of market distress were specific to different emerging economies. “Yesterday’s sell-off . . . really just highlighted what’s been happening all month,” said Patrick Chovanec, managing director, Silvercrest Asset Management in New York. “We’re seeing a gradual and cumulative realisation that the growth prospects for many EM economies, long seen as a given, are in fact problematic at best.”
The main causes of Argentina’s problems have been that Buenos Aires, beset by a large current account deficit and meagre foreign currency reserves, has allowed domestic inflation to reach about 25 per cent, driving its citizens to seek a store of value by changing their pesos for US dollars.
A key issue for Brazil and South Africa, by contrast, has been signs that the Chinese economy may be slowing amid financial distress among shadow finance institutions. China imports large quantities of raw materials from both Brazil and South Africa. Russia’s economy is also closely tied to the price of commodities that have been driven by China’s easing investment demand, economists said.
Turkey and India are concerned whether the unwinding of US stimulus may deplete the flows of liquidity necessary to finance current account deficits and short-term debt.
The emerging markets turmoil also triggered a global sell-off in riskier assets and a rush into safer bond markets. European shares, seen as having a higher risk premium than bonds, were hit, and the FTSE Eurofirst 300 index fell 2.4 per cent – its biggest one-day drop since June last year. Germany’s Dax index dropped 2.5 per cent.
Argentina attempted yesterday to shore up confidence. Jorge Capitanich, cabinet chief, announced a minor relaxation in capital controls, allowing from next week Argentines to buy US dollars with savings and reducing tax on such purchases.
But on the streets of Buenos Aires, there was anger over what many see as economic policy on the hoof. “This is all improvised. They don’t know what they are doing. Inflation is going to rise. I wish I could buy dollars but there is no purchasing power,” said Antonio Lopez, 63, as he bought a newspaper.
Traders sold currencies already weakened by months of depreciation. The peso fell 1.73 per cent to 8.02 to the US dollar by 5pm in London, following its 10 per cent fall on Thursday. The Turkish lira, Russian rouble, and Indian rupee all ended the day weaker, while the South African rand hit a five-year low. The peso is down 15.06 per cent on the week and the S&P 500 by 3 per cent.
Although Argentina’s woes were a catalyst, the causes of market distress were specific to different emerging economies. “Yesterday’s sell-off . . . really just highlighted what’s been happening all month,” said Patrick Chovanec, managing director, Silvercrest Asset Management in New York. “We’re seeing a gradual and cumulative realisation that the growth prospects for many EM economies, long seen as a given, are in fact problematic at best.”
The main causes of Argentina’s problems have been that Buenos Aires, beset by a large current account deficit and meagre foreign currency reserves, has allowed domestic inflation to reach about 25 per cent, driving its citizens to seek a store of value by changing their pesos for US dollars.
A key issue for Brazil and South Africa, by contrast, has been signs that the Chinese economy may be slowing amid financial distress among shadow finance institutions. China imports large quantities of raw materials from both Brazil and South Africa. Russia’s economy is also closely tied to the price of commodities that have been driven by China’s easing investment demand, economists said.
Turkey and India are concerned whether the unwinding of US stimulus may deplete the flows of liquidity necessary to finance current account deficits and short-term debt.
Three questions were presented by Prof. Navaro teaching Macroeconomics on the coursera platform, at the University of California Irvine.
Team, The article
below from the Financial Times analyzes various aspects of the global financial
market meltdown on Friday. It's a beautiful case study of the kinds of things
we are trying to learn in economics and underscores why your studies are
important.
As you read the article, consider these questions and comment on them in our discussion below: Currencies hit in the wake of Argentina
1. Why are Argentines seeking to buy the U.S. dollar?
2. What role does the U.S. Federal Reserve play in the collapse of the emerging markets, particularly Brazil and India?
3. Why is China making the markets uneasy?
As you read the article, consider these questions and comment on them in our discussion below: Currencies hit in the wake of Argentina
1. Why are Argentines seeking to buy the U.S. dollar?
2. What role does the U.S. Federal Reserve play in the collapse of the emerging markets, particularly Brazil and India?
3. Why is China making the markets uneasy?
Here are my answers below and comments on the events of Emerging Markets last week that sent the stock markets tumble.
1. Argentina is thus trying to increase its foreign
reserves by boosting inflation, thus making their local currency worthless to
its citizens. Argentina must be running a huge current account deficit, so by
currency devaluation it is trying to shift and increase its foreign currency
reserves so as to make exports more attractive. I see translation exposure.
Also pegging its currency as another Bretton - Woods.... Its exports would then
be LESS expensive. If Argentina uses external debt to finance its investments
with higher rate of return than the rate it borrows, it will remain solvent
thus be in a position to finance its debt even though having a current account
deficit.
2. The FED is most likely
pulling away from investing or buying government bonds of emerging markets,
thus pulling out dollar denominated bonds and investing in much more safer
markets with a safer return. How would these EM countries close current account
deficits? First, it means that their real GDP output is less than potential. They
are also having demand pull inflation with lower output (exports being one
determinant) and high inflation.
3. Why is China making markets uneasy? Doing a
little research, i found that China is easing up on investment demand, on its
definition. That is, the ID depicts the dollar value of investment projects
demanded, for every interest rate. It is downward sloping, because as ir goes
up, demand for investments goes down. As the cost of capital goes up, demand
for new projects will be unprofitable, or NPV will be negative, thus you will
be unwilling to take up the project. China is thus easing this in its
commodities and is mainly favoring Russia. For the other EM countries, like
Brazil and South Africa, is influence by financial distress among shadow
financial institutions in China. That is, they, banks, individuals, have
liquidity problems and are unable to pay their dues because of financial
distress. Those i guess are suppliers of such raw materials that China is
importing from the EM countries, and are demanding cash on delivery.
