« The whole scenario of global recovery is being put into question ». This is the heartfelt cry of a banking analyst in Paris, as quoted by Le Figaro last Friday, after the stock markets fell worldwide. The specter of a crisis in emerging countries is back. A veritable tsunami is sweeping through their currencies : The argentine peso has lost 20% to the US dollar since the start of the year, the turkish pound has lost 30% over the last twelve months. The mexican peso, the brazilian real and the south african rand are caught in this downward trend as well.
Emerging countries aren’t the Eldorados they used to be! And China, the main one, is showing signs of weakening... Everyone realises that China’s growth is the driving force of emerging countries. Also, the main bank of the country, ICBC, might actually default. It was selling a fund promising a 10% yearly return, a much higher performance than classic bank offerings, but that promise evaporated, because the money invested in the fund was not used to exploit a mine , as was supposed to be the case. Even though ICBC had been the seller, it first refused to acknowledge any responsibility in the incriminated product before finally settling on an agreement in order to avoid capital losses for the clients. The highest authorities had to intervene to avoid a confidence crisis, but the whole thing illustrates just how much this shadow banking system has grown in China and has become dangerous.
Markets are plunging, not surprisingly, because worries were already surfacing a few months ago. We had written Emerging Countries : The End Game?, this last August, when there were already capital movements appearing. We are witnessing a crystalisation of those worries, an amplification of mistrust, an acceleration of the crisis. In Argentina, the central bank is no longer trying to support the peso and is keeping its reserves for the buying of first-necessity products that need to be imported. The result : The peso is tumbling again, and the 28% inflation rate seen in 2013 might very well be beaten in 2014.
Should we fear a contagion effect toward the industrialised countries? Not at all, are quick to state several European leaders through AFP (Agence France-Presse), one of which, Eurogroup president, Jeroen Dijsselbloem, said, « I don’t think there will be any contagion of the risks weighing on emerging economies toward the Eurozone ». Really? Not even in Spain and Portugal, with their economies having strong links with Latin America? If it ever were the case, it would be game over for this very timid and discreet recovery that keeps being touted incessantly, as if believing strongly in it could make it happen for real...
Is this a secondary phenomenon or a first bubble starting to pop, as a precursor to others? We shall see, though we think the latter is the case. Regardless, this crisis reflects the fragility of the global economy. This crisis also demonstrates that central banks can lose control of the situation and become powerless before the devaluation of their currencies and out-of-control prices. Could this be a warning shot to the Bank of Japan, the Fed and the ECB?
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Philippe Herlin Finance Researcher / Member of the Goldbroker Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.