Emerging market stars have lost their lustre
Investors withdrawing money over fears of Fed tightening monetary supply
The truth is more banal: the real cause of the expansion that precedes the typical financial crisis is usually a flood of cheap (or relatively cheap) credit, often from abroad.
Thai companies in the 1990s borrowed dollars short-term at low rates of interest and made long-term investments in property, industry and infrastructure at home, where they expected high returns in Thai baht, a currency that had long held steady against the dollar.
The same happened in Spain and Portugal in the 2000s, although the low-interest loans that fuelled the property boom were mostly north-to-south transfers within the euro zone and in the same currency as the expected returns. Indeed, the euro was labelled “a deadly painkiller” because the use of a common currency hid the financial imbalances emerging in southern Europe and Ireland.
Phase Two of a financial crisis is the downfall itself. It is the moment when everyone realises the emperor is naked; to put it another way, the tide of easy money recedes for some reason, and suddenly the current account deficits, the poverty of investment returns and the fragility of indebted corporations and the banks that lent to them are exposed to view.
That is what has started happening over the past two weeks as investors take stock of the Fed’s likely “tapering”. And the fate of India – the rupee is one of the “Fragile Five”, according to Morgan Stanley, alongside the currencies of Brazil, Indonesia, South Africa and Turkey – is particularly instructive.
It is not that all of India’s economic fundamentals are bad. As Palaniappan Chidambaram, finance minister, said on Thursday, the public debt burden has actually fallen in the past six years to less than 70 per cent of GDP – but then the same was true of Spain as it entered its own grave economic crisis in 2009. Like Spain, India has tolerated slack lending practices by quasi-official banks to finance the huge property and infrastructure projects of tycoons who may struggle to repay their loans.
Ominously, bad and restructured loans have more than doubled at Indian state banks in the past four years, reaching an alarming 11.7 per cent of total assets. According to Credit Suisse, combined gross debts at 10 of India’s biggest industrial conglomerates have risen 15 per cent in the past year to reach $102 billion.
For those who take the long view, a more serious failing is that India has manifestly missed the kind of economic opportunity that comes along only once in an age. Instead of welcoming investment with open arms and replacing China as the principal source of the world’s manufactured goods, India under Sonia Gandhi and the Congress party, long suspicious of business, has opted to enlarge the world’s biggest welfare state, subsidising everything from rice, fertiliser and gas to housing and rural employment.
Phase Three is when ministers and central bank governors survey the wreckage of a once-vibrant economy and try to work out how to rebuild it. India’s underlying economy is nevertheless sound and its banks are safe, say Mr Chidambaram and other senior officials. There is therefore no need to contemplate asking for help from the IMF or anyone else.
Mr Sócrates said much the same in Lisbon three years ago. “Portugal doesn’t need any help,” he said. “We only need the understanding of the markets.” The markets did not understand, and Portugal did need the help.
– Copyright The Financial Times Limited 2013