It appears that in recent days red economics flags are being raised in all corners of the world. Venezuela is in major trouble, and so is Argentina, despite securing a bailout from the International Monetary Fund. Turkey, too, rattled the financial markets over the past few weeks with the major drop of the lira. South Africa also joined in the turmoil. The currencies of Russia and India are also not without their own issues currently. This is why we wanted to use this chance to touch upon some of the major financial problems in the world right now and estimate their impact on the markets.
The most logical first question for anyone trying to understand the situation is, why now? What is currently happening in the world that is adding so much pressure on emerging markets, forcing so many different currencies to suffer? The answer lies in the American dollar and the monetary policy of the US Federal Reserve. Note that the USD is the world’s most popular reserve currency, which typically facilitates international trade and investment. Many emerging markets have international loans in American dollars. This was fine in the first couple of years after the 2008 financial crisis, because interest rates were low all around the world. However, the Federal Reserve has been the first central bank in the world to confidently start increasing interest rates back up again. These rate hikes are becoming more and more frequent these days as the US economy is thriving. Nevertheless, this has meant that countries like Turkey and Argentina now owe much more than they did just a few years ago. Keeping up with their financial commitments has been very difficult, which in turn has led to rampant inflation.
The trade wars led by US President Donald Trump certainly aren’t making things any better. With countries looking for ways to avoid fees or compensate for them through other means, the balance of global trade has been thrown in an upset. Turkey, specifically, used to enjoy tariff-free trade with the United States until their most recent political altercation which caused Trump to impose tariffs as leverage. China, Trump’s number one target when it comes to trade and tariffs, is visibly experiencing an economic slowdown. Though it did not start with Trump, the current situation is making the problem worse. Considering how pivotal China is for the global economy, any trouble there is bound to have a negative effect experienced throughout the whole world.
Turkey is among the biggest losers. The Turkish lira dropped almost in half against the dollar in 2018 alone. The European creditors of Turkish banks are worried that a full-blown crisis in the Middle-Eastern country could mess with the ECB’s plans to wind down stimulus and transition into a monetary policy more in line with the Federal Reserve’s approach in 2019. Argentine, too, despite the financial help from the IMF, is currently struggling with interest rates of 60%, over 20 times what the rate in the United States is.
Yet despite the mass panic on the international markets, things in the United States remain calm, at least economically. The Fed will continue with the scheduled interest rate hikes, and the US stock markets, though still susceptible to minor shocks, remain close to historic highs.
So, are we to witness another global crisis? It’s too early to tell. Nevertheless, the Federal Reserve can certainly help calm the markets if they compromised their current approach and postpone interest rate increases for a while, giving time to emerging markets to adjust.