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Markets

Financial turmoil hits emerging economies

The pressure is on emerging nations after the US central bank further cut its stimulus. Currencies in Turkey, India and Brazil have fallen. This is unlikely to set off a global crisis but may make for a bumpy 2014.

Turkish Central Bank Governor Erdem Basci surely had hoped for a better turn of events when he opted to increase Turkey's key interest rates on Tuesday (28.01.2014). The world's financial markets breathed a quick sigh of relief only to spiral further downward. Many currencies - from Brazil's real to Indian rupees to the Russian ruble - plunged as well.

This has caused analysts to compare events to the Asian economic crisis that severely affected several East Asian countries in 1997. Or will it be even worse than that? Are these maybe the writings on the wall for a new global financial crisis?

According to chief economist Holger Schmieding of Berenberg Bank, the world doesn't need to prepare for a new financial crisis. But emerging nations are facing serious challenges which "could indeed lead to a financial crisis for these countries," Schmieding told DW.

The Western world is in a comparatively comfortable situation, Schmieding added. "I don't think turbulence in some of the emerging nations will have huge permanent consequences for the Western world," he said.

Closer look at individual countries

But it's also necessary to take a closer look at the individual emerging nations. It's mostly crisis-stricken countries such as Turkey or Argentina that are facing problems since they also have to deal with a political crisis, according to financial analyst Christoph Zwermann of Zwermann Financial.

Indian rupees (photo: Prabhakar Mani Tewari)

Countries like India have huge currency reserves and are able to deal with a potential crisis

Other countries, such as India or Brazil, sit on huge currency reserves and would be able to ward off a crisis on their own.

Zwermann said the turnaround of the US Federal Reserve's financial policy contributed to recent turbulence. Capital that used to flow into emerging nations for an extended period of time - especially from the United States - has not been pulled out.

"That won't lead to a crisis in that regard, but it will lead to serious corrections on the markets, which can also be healthy since they are necessary," he told DW, adding that this would affect everyone, "including the old economies' stock markets."

Is the US to blame?

But is it just the Federal Reserve's change in policy to cut bond purchases that is responsible for these turbulences? "No, the Americans definitely aren't at fault this time," Schmieding said. For a long time, the United States had pursued a rather loose monetary policy to help its own economy. "They now need to tighten this policy a bit, it's also in their own interest," he added.

The United States cannot be blamed for emerging nations that chose to borrow cheap American money rather than carrying out reforms in their country, Schmieding said. The emerging nations have to create their own policies, he added.

USA, Washington, Eccles Building (photo: Antje Passenheim)

The US Federal Reserve has reduced its bond-purchasing program

And there is a huge list of tasks piling up: Brazil and India for instance need to tackle reforms. They also focus too much on protectionist measures to protect their national economy. In Turkey, it's corruption that's got out of hand and has led to a political crisis. That has made investors wary and stopped the boom there for now. Argentina has never recovered from its peso crisis; Indonesia lacks an industrial footing for a sustainable revival.

Investors choose stability over chaos

With so many factors breeding insecurity, investors are choosing to put their money in more stable places, which means investing in the US, whose economy is thriving again, or in the eurozone where most of the problems seem to have been tackled.

Schmieding said he doesn't see a threat looming: "I believe 'threat' is the wrong term here. What poses a 'threat' is if we end up returning to normal conditions."

His view was echoed by Zwermann. But he also pointed out it could be problematic if reactions on financial markets were to increase considerably from their current levels - which would have implications on the real economy.

"From that moment, everything would become more difficult," he said. But there is no reason for panic, he added, since the overall global economy would still be on the path to recovery.

Many observers have predicted 2014 as the year of transition for the global economy - leaving stimulus policies behind and turning to a development that's carried by growth. Though they add that the transition won't come without some bumps along the way.

DW.DE