Is a currency crisis next?

A recent report by Paul Krugman warned that we are about to witness the mother of all currency crises in emerging markets. http://economistsview.typepad.com/economistsview/2008/10/is-a-currency-c.html

He says emerging markets are “being swept under by a currency crisis that is not of their own making”. Moreover, most of the world needs to be aware that this could transform the deep recession —-into a great depression. He hopes that the IMF will have an announcement in time to make a difference”. It could prove a make or break week.

Our own Australian dollar has already seen a near-40% decline in our currency. And that is not the worst of it.

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Tony Harris
Tony Harris(@tony-harris)
13 years ago

Interesting to see how quickly the situation deteriorated after various governments became even more actively involved. Makes you wonder?

Remember the warning in the New York times of 1999? The burden of a bad debts beng piled up with the aid of the quasi state instrumentalities Fannie and Freddie will hit the wall when home prices inevitably tank and there will be a demand for another Savings and Loans bailout.

As someone said, those who will not learn the lessons of history will just have to repeat them.

As for the performance of the Rudd Government over the last couple of weeks! Imagine if the media were giving a straight feed instead of boosting Kev! How much would you have to pay to get the kind of PR that Paul Kelly is providing? No I am not suggesting that he has to be bribed, he is doing it for love!

NPOV
NPOV
13 years ago

Doesn’t make me wonder very much Rafe, because from what I’ve read, the amount of money governments have been throwing at banks with some hope of containing things is actually pretty small compared to the writedowns and losses involved.

As far as our own government goes, there’s zero indication that the coalition would have managed any better (and that’s being polite). Nobody expressed any public concern when the plan to unconditionally guarantee all deposits was first made. And I’m not aware of any reason to believe that the markets (or voters) have lost faith in the government (along with the Treasury Dept. and Reserve Bank) to keep a handle on things.

Patrick
Patrick(@patrick)
13 years ago

Um, yes, NPOV, but since I chose not to own any banks’ shares (except through index funds) I don’t really care how big the mark-downs are.

And I care a hell of a lot less than I care about what should be money being given to the banks to recapitalise them.

JC
JC(@jc)
13 years ago

The ironic thing is that everyone was looking at the US as being ground zero for the next earthquake. The US started to look like the veritable rock of Gibraltar over the past few days :-)

Proving the cockroach theory still holds- there’s always more than one cockroach…. we get this dandy info.

Spanish banks have $320 billion loaned to south America. Swiss and Austrian banks have up to the equivalent of 70% of their GDP loaned to Eastern block countries through the banking system. Meanwhile the UK has around $150 billion loaned to emerging Asia. These are truly extraordinary numbers. Most of these loans are US denominated so no wonder there is a dollar shortage.

Ironically the US banks have little exposure to these areas.

This is what I simply can’t understand……. The ECB needs to lower rates quickly before their asset markets implode yet they are fiddling around to see what happens to the CPI. Amazing.

The Japanese should have been intervening like crazy this morning to weaken the yen and they’re nowhere to be seen. The Japanese could have stemmed the tide of the most recent implosion by simply going back to zero interest rate policy and monetizing their soon to arrive deflation by unsterilized intervention.

Seriously the US authorities look like geniuses compared to the Japanese and the Europeans to a lesser extent.

The real problem with the currency implosion is that it increasingly looks like the surplus countries are not recycling causing an even bigger problem. In fact they are repatriating.

The stupidity and ignorance of Japanese non actions over the past few days is truly astounding.

In fact I would call the failure of the Japanese no action in intervention is the big policy mistake of the crisis.

Seriously, Fred, if you some know people over at Treasury you ought to talk to them get to Swan to put a rocket under the Japanese and intervene. I really think they don’t know what they are doing.

Paul Frijters
Paul Frijters(@paul-frijters)
13 years ago

the problem with this crisis is not that it is unclear what to do. The problem is that it is only clear a week too late. This currency crisis is a good example because we at present dont know what all these people who have had loans repaid in dollars are doing with these dollars. If anyone can tell me what they are going to do with that now, I can tell you how to prevent the next installment in this crisis. If they get reinvested where they roughly were first, then the best reaction is to do nothing and wait for the prices to sort themselves out. If the dollars are going to be put in high-liqAnyone have a clue? That’s the problem.

Paul Frijters
Paul Frijters(@paul-frijters)
13 years ago

damn html buttons published my comment before it was fully written!
If the dollars are going to be put in high-liquidity, low-risk options (like overnight deposits at the central banks, or one of these guaranteed deposits that have now come to mess up the price system) then the real impacts of these ‘financially induced’ exchange rate prices is going to be enormous and central banks will have to quickly put some system in place to prop up several currencies and prevent the collapse of trade.
Who is to say that it is not the bank guarantees that are causing much of the disruption on the currency markets? I can give you the answer next week, but not today.

JC
JC(@jc)
13 years ago

Paul

There’s a wholesale margin call going on all over the world with these loans. Banks have top up requirements when there is currency dislocation which is why the dollar is in high demand.
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Blame the Japanese. They should have intervened on Friday/today and they didn’t. Sometimes policy response is bleeding obvious and sometimes it isn’t. As a result of their rank stupidity they now have the Nikkei equal to 1982 levels. This is wealth destruction in an absolute mind boggling way.

They always do this shit at a time of crisis. They are really friggen useless in terms of responding to crisis. It took them 7 years to come up with a TARP in the 90’s.

The only ever intervened when their back was to the wall.

Michael Kalecki
Michael Kalecki
13 years ago

Rafe,

The current problems happened AFTER the US Government decided to let Lehman Bros go under!

No wonder you do not understand the current predicament when you still get the problems of the depression wrong.

JC
JC(@jc)
13 years ago

Rafe

In case you didn’t know that’s homer wearing a silly disguise.

rog
rog
13 years ago

What Homer appears to be saying is that there was no problem until “the US Government decided to let Lehman Bros go under”

Michael Kalecki
Michael Kalecki
13 years ago

No rog,

The problems were exacerbated enormously AFTER the decision on Lehman Bros.

The Decision was stupid ex-ante and very stupid ex-poste.

If there is one thing we have learned from Depressions it is not to allow Financial companies to go broke.
Unfortunately Rafe appears to have missed this.

You then go to the Liquidity trap

rog
rog
13 years ago

You seems to correcting yourself Homer, not much left for me to do? Compare

The current problems happened AFTER the US Government decided to let Lehman Bros go under

with

The problems were exacerbated enormously AFTER the decision on Lehman Bros.

Michael Kalecki
Michael Kalecki
13 years ago

err Rog,

how are the two sentences contradictory?