Analysis: Black Swan Dangers May Lurk in Emerging Markets

Cape Times (South Africa), June 30, 2015 | Go to article overview

Analysis: Black Swan Dangers May Lurk in Emerging Markets


BYLINE: Bloomberg

HERE we go again. A flight to haven assets has begun as Greece's economy faces a tailspin, with concern that defaults and bank collapses could spill over to other European nations, with the impact going global.

This time, though, Europe and the US confront the risk of contagion with a strengthened policy toolkit - including new mechanisms to monitor and support banks, and a system of swop lines to inject liquidity. In Japan, the central bank is led by a governor who's already pumping unprecedented monetary stimulus.

Less trepidation

If developed markets can regard the risk of Grexit with less trepidation than the maelstrom of 2008, for emerging markets, some of the ground has shifted in an undesired direction. Their combined growth rate is less than half the pace of 2007. Some, including Indonesia and Malaysia, have mounted up on dollar-denominated debt even as their currencies slumped, increasing their vulnerability in a mass exodus from risk.

"Psychologically almost everyone is prepared for some kind of Grexit," said Andrew Sheng, a distinguished fellow at the Fung Global Institute in Hong Kong, who previously worked at the Hong Kong Monetary Authority and Malaysia's central bank. "What we don't know is whether there is some unknown black swans out there that nobody figured out."

Emerging market currencies from the Hungarian forint to Indonesian rupiah retreated in the wake of Greece's decision to halt bailout talks with European and International Monetary Fund (IMF) officials. Chinese stocks tumbled.

Impact limited

Direct impact from a deepening Greek recession is likely to be limited for distant economies - for example, China's exports to Greece make up just 0.18 percent of its total. A hit to European growth as a whole would pose a bigger challenge: almost 16 percent of Chinese shipments go to the EU. …

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