Forex Trader Column: Emerging Markets in Crisis

More and more emerging markets find themselves in financial difficulties. It is the combination of deficits in the current account and government budget, which is particularly problematic. The rating agencies have indicated an early stage with gradations of credit ratings reacted – probably will not again be accused of failure as in the U.S. real estate loans to be suspended. Thus, for example the Ukrainian grivna to a new record low fallen, after the agency Moody’s threatened a further variation, since the political infighting in Kiev an appropriate response to the financial crisis would prevent. Indian rupee under selling pressure in other countries, the government is capable of action, but in an effort to stimulate the economy again, the soundness of public finances lost from sight. This applies for example for India, according to Standard & Poor’s classification of his state loans to junk-level “threat. The government in New Delhi tries mainly through tax cuts to mitigate the economic crash. The government deficit is expected this year to six per cent in relation to GDP. India has, in contrast to China do not have large foreign currency reserves to its current account deficit to finance, and a devaluation of the rupee to prevent. The rupee is against the U.S. dollar to a new low and has fallen so in twelve months by approximately 25 percent devalued. Compared with the euro is the Indian currency is relatively stable, but is currently also on devaluation rate. Less scope for rate cuts, the gradation of the credit ratings for the affected countries be of great importance because it increases financing costs and thus the interest burden in the state budget. In some high debt reduces the financial scope of the governments further. This is also the monetary policy response. To prevent capital flight and devaluation pressure on the currency to mitigate the interest rate must be increased or at least not be further reduced. This is bad for the economy and ensure that the affected countries will need longer to overcome recession. First consequences have already been identified: The Polish central bank has the key to last only 25 basis points to 4.00 percent, less than expected decrease. The downward pressure on the zloty was thus – as in the other Eastern European currencies – at least temporarily slowed down. Sample countries China and Chile that it can be different, for example, shows in addition to China also Chile. The model country in South America has good times in foreign exchange reserves, which are now used to finance an economic program can be used. The Chilean peso has become since the beginning of the year especially against the euro value. Even better is because China, with its huge foreign exchange reserves, the stability of the financial system can guarantee. The recession, however, neither China nor Chile trace over, but both countries have the conditions to get back quicker than others to be exempt from it. Conclusion The situation in the emerging markets is likely to deteriorate further. Investors should be the countries with high deficits in the current state budget and avoid them. The necessary adjustment process, ie the restoration of financial soundness, will take a long time, and the recession in these countries.