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Op-Ed Columnist - The Widening Gyre - NYTimes.com

Some of these disasters were more or less anticipated. Economists have wondered for some time why hedge funds weren't suffering more amid the financial carnage. They need wonder no longer: investors are pulling their money out of these funds, forcing fund managers to raise cash with fire sales of stocks and other assets.

The really shocking thing, however, is the way the crisis is spreading to emerging markets -- countries like Russia, Korea and Brazil.

These countries were at the core of the last global financial crisis, in the late 1990s (which seemed like a big deal at the time, but was a day at the beach compared with what we're going through now). They responded to that experience by building up huge war chests of dollars and euros, which were supposed to protect them in the event of any future emergency. And not long ago everyone was talking about "decoupling," the supposed ability of emerging market economies to keep growing even if the United States fell into recession. "Decoupling is no myth," The Economist assured its readers back in March. "Indeed, it may yet save the world economy."

That was then. Now the emerging markets are in big trouble. In fact, says Stephen Jen, the chief currency economist at Morgan Stanley, the "hard landing" in emerging markets may become the "second epicenter" of the global crisis. (U.S. financial markets were the first.)

What happened? In the 1990s, emerging market governments were vulnerable because they had made a habit of borrowing abroad; when the inflow of dollars dried up, they were pushed to the brink. Since then they have been careful to borrow mainly in domestic markets, while building up lots of dollar reserves. But all their caution was undone by the private sector's obliviousness to risk.

In Russia, for example, banks and corporations rushed to borrow abroad, because dollar interest rates were lower than ruble rates. So while the Russian government was accumulating an impressive hoard of foreign exchange, Russian corporations and banks were running up equally impressive foreign debts. Now their credit lines have been cut off, and they're in desperate straits.

by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 27th, 2008 at 10:01:08 AM EST
[ Parent ]
In Russia, for example, banks and corporations rushed to borrow abroad, because dollar interest rates were lower than ruble rates. So while the Russian government was accumulating an impressive hoard of foreign exchange, Russian corporations and banks were running up equally impressive foreign debts. Now their credit lines have been cut off, and they're in desperate straits.

Gah - speechless.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 10:06:03 AM EST
[ Parent ]
naked capitalism

A big reason for the worsening of mood in Japan is that its banks, which have heretofore looked solid by global standards, are suddenly looking as if they too might need to raise capital. The reason? Japanese banks, a legacy of the zaibatsu days, hold substantial equity positions in other companies (note these stockholdings are much smaller than they were in the bubble years, when banks were important members of industrial groupings, later called keiretsu as the linkages weakened). The BIS, in a concession to this Japanese peculiarity, allowed a portion of the value of these shares to be counted towards regulatory capital requirements (forgive me for not checking the current rules, but it used to be 50%).
by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 27th, 2008 at 10:16:47 AM EST
[ Parent ]
Good cath. In CEE, too, the foreign-denominated loan problem is not one of public finances but consumers'.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Oct 27th, 2008 at 04:43:12 PM EST
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