A Global Emerging Market Crisis

At some point over the last few years, many of us have considered moving our retirement savings overseas in order to avoid the financial calamity now sweeping the nation.
Almost without exception that strategy turned into a major loser. Amazingly when you consider the collateral damage on Wall Street, just about every market in the world has done worse than America's this year.

And just when you didn't think it couldn't get any worse, the global financial crisis appears to be mutating from a credit crunch to a more serious global currency crisis.

Iceland's financial system and currency suffered a complete collapse last week. A default on sovereign debt now seems imminent.
The question on the minds of everyone on Wall Street is: who's next?

Argentina's government seized $29 Billion in the nation's pension funds yesterday. For those of you that remember the 2001 crisis, this was what the Argentina government did right before defaulting on its debt.
The markets reacted as you might expect.

Emerging-market bonds, currencies and stocks plunged from Brazil to Russia as speculation Argentina may default added to concerns of a global recession.

"Argentina heaps another negative onto an already very delicate global picture," said Tom Fallon, head of emerging markets at La Francaise des Placements in Paris, which manages $11 billion. "What started not as an emerging market crisis has become one."

Credit-default swaps tied to Argentina's debt are "already at default levels," said Fallon at La Francaise.
...
The IMF is preparing to help Iceland, Hungary and Ukraine weather the credit crisis. Hungary, which cut its economic growth forecast to 1.2 percent from 3 percent last week, unexpectedly raised its key interest rate by 3 percentage points today to shore up the forint.

The forint and Turkey's lira may follow Iceland's krona, the Ukrainian hryvnia and South Africa's rand to a "currency crisis" in "a matter of days," Merrill Lynch & Co. emerging- market strategist Benoit Anne said today.

Many of these currency crisis are happening even before the countries dip into recession.
For instance, Hungary was forced to their benchmark interest rate to 11.5% yesterday in order to defend their currency, which dipped to a record low against the Euro. The European Central Bank recently lent Hungary five billion euros. It was the first time that the ECB has lent money outside of the eurozone.

Hungary's financial problems are the same problem that afflicts all the old Soviet Union countries and much of the third world - heavy borrowing of foreign currencies and lending in local currencies.
That works fine when the foreign currency is falling, but it backfires in a big way when the trends reverse.

The trend has reversed in a very big way. In fact, it is picking up speed in recent days.
The reason for this is the credit crunch on American banks and hedge funds is forcing them to raise capital in any way possible. This includes selling assets overseas and repatriating the funds. This forces down foreign currencies while pushing up the dollar.

Estonia, Latvia, Lithuania, and the Ukraine are all in danger of a currency and banking collapse, with Ukraine leading the pack. As their currencies fall domestic prices spike. This is especially true for these nations who rely on imports for consumer products.
Kazakhstan is right behind them in financial difficulty.

Russia is not immune from the crisis either. Fully a third of all local-currency bonds are under "distress", and yield are expected to soar to levels so high that they will be "impossible" to roll over. The stock market in Russia has already dropped more than 60% from its highs earlier this year.

"International investors ran away and Russian banks are just thinking about themselves, so there are no investors to buy," Gaevski said. "No new issues are being placed, so six months down the road we'll have no market" because most of the outstanding debt matures within a year, he said.

Brazil is also suffering effects from the global crisis, although it should weather them better than Argentina.

A Real Muslim Problem

Quite probably the most dangerous geopolitical problem stemming from this financial crisis is Pakistan.

The global financial crisis is close to knocking out its most important and potentially most dangerous victim yet: Pakistan needs a financial support package of $10 billion to $15 billion to avoid collapse.
f the government in Islamabad goes bankrupt, then the extreme Islamist forces spearheaded by the Taliban of Afghanistan, who already enjoy broad support among the Pashtun tribes of the NWFP, will have a far greater chance to turn the great cities of Pakistan, especially giant Karachi, into chaos.

A nuclear power with a collapsing economy and government, facing a determined fanatical insurgency is not something I want to think about. Yet that is exactly what we may be facing in just a few weeks.

Pakistan isn't the only muslim nation in trouble. Turkey has its own problems. However, they are unlikely to be as serious as Pakistan's because Turkey's economy was restructured after the 2001 meltdown.

Comments

That is because

The whole bloody world is over leveraged on loans to production, 10:1

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Maximum jobs, not maximum profits.

Pakistan

I don't want to think about that either. A ticking time bomb with nuclear technology in chaos....wonderful...
and yet our lovely government goes around trading jobs and nukes routinely as a matter of foreign policy...problem is...things change!

I'm reading about the IMF and other bail outs on these EEs but I'm wondering what happens if their currency collapses..
make the dollar go up, go down, go sideways, or just barrel it and burn it.

I have no idea at this point for I thought gold would increase due to the ballooning money supply, deficits and it is collapsing.

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Gold is collapsing?

Funny, I just read the opposite in a really good article defining derivatives- way down at the end in "where we are today" is an admitedly anecdotal story that gold and silver simply are not available at the stated wholesale price *at all*.

That link makes me wish I had an abandoned gold mine- the dust would be well worth it.

 

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Maximum jobs, not maximum profits.

yes

Commodities generally are.

24 hr chart.

Physical gold and silver might be another thing and that would be where you buy the actual bullion itself in terms of coins, bars, jewelry but the above also is physical gold.

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Ok, so you were talking about the spot price

Yes, the actual bullion seems unobtainum at the spot price, which is really weird.

Not sure why, but this is the third instance I've run into of an article claiming that actual gold and silver bullion is not available at the price quoted.

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truly

I've seen a series of articles about this as well, but I suspect that institutions, hedge funds and so on are dumping gold to raise cash, margin calls and so on, which is seemingly the thing that dictates price.

I have no idea actually it's really strange. The Mess That Greenspan Made blog (see middle column) has written a few pieces on this as well.

Another area I really do not understand are bond markets, so I don't know if those are save haven or doing similar weird things.

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Argentina & Pakistan

Bloomberg is reporting:

The cost of protecting corporate bonds from default surged to a record on concern Argentina and Pakistan may default, worsening global economic turmoil

I think about the last thing the world needs is for Pakistan to erupt in complete chaos. Way to go idiots trading jobs for foreign policy and to pull these emerging economies into the "global" economy. Contagion probably means a lot more than economic turmoil.

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The contagion spreads

I guess it's time to try to write up that diary on derivatives.

I'll be honest, I've finally got the idea behind CDS down now, and the interest rate and foreign exchange swaps have largely been unaffected.

The CDS are only about 8.5% of the total derivative market.

And virtually all of the credit derivatives are the CDS.

Sovereign debt default though could widen the crisis to the foreign exchange swaps. That's a market nearly a fifth larger than the CDS market And while the underlying asset in the case of the CDS market: homes and other private property, is prone to fail in fits and starts. The underlying asset in the foreign exchange swaps: national creditworthiness, is likely to crash in chunks.

Meaning we ain't seen nothing yet.

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CDSes, references, on EP

On EP we have quite a bit of material on derivatives so you might want to do a search or a taxonomy term on it (taxonomy is another word for meta tag categorization, which is on this site extensively).

search results.

taxomony or those meta tags (they categorize all posts with those meta tags).

And Origins of Subprime: Derivatives is one of the most highly read posts but very good and goes all the way back to the Nixon administration on derivatives.

I also put up some tutorials in Friday Night Video series on derivatives.

This is also a FYI, we have some powerful, awesome search and taxonomy architecture on this site and for me it's a Godsend for I can't remember every reference, quote piece on each topic. I'm not sure if others even realize that top right corner is a search box and also the keys to the kingdom on finding information on EP.

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