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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

What is happening on the international markets?

Many economists claim the current year will be “unstable” and it depends, to a large extent, on China whether the world must expect “great shakes”
18 February, 2014 - 10:55

The past few weeks have seen a steady fall in the world’s key financial institutions’ indexes. Dow Jones dropped its index by more than 5 percent last January. And the point is not only in severe frosts in the US and poor statistics of the key companies. The slump in the currencies of some developing countries has added gray “colors” to the current picture. The Argentine peso went cheaper by 19 percent in January. The currencies of South Africa, Turkey, India, Brazil, and some other countries had come under pressure well before this. The Russian ruble has also “sagged” a little.

Brazil, South Africa, Turkey, and Ukraine are the emerging markets most at risk of a “sudden stop,” which refers to an abrupt halt of capital flows into a country, according to Morgan Stanley. In the view of this investment bank’s analysts, India, Indonesia, Mexico and Thailand could also face such a phenomenon as market players turn their backs on emerging markets.

Some analysts are already speaking of “conditions for a currency crisis” in some countries. Their comments came as central banks in India, Turkey, and South Africa raised benchmark interest rates to defend their currencies, The International Business Times says. This will have a negative effect on economic growth rates. A “sudden stop” is defined as a halt or even a reversal in capital flows into a country, as well as cutting access to international financial markets for a prolonged period. The outflow of capital from these countries is in full swing. Global funds pulled 6.3 billion dollars from emerging-market stocks in the week through January 29, the biggest outflow since August 2011, according to Barclays Plc. According to Societe Generale, since cumulative inflows into emerging market equity funds reached a peak of 220 billion dollars in February last year, 60 billion dollars of funds has fled elsewhere. Some forecasts say that the outflow speed will increase in the near future. This is connected with, among other things, the gradual tapering of the US FRS “quantitative easing” – with the risk remaining the same, the US market’s profitability has grown.

Many economists are saying the current year will be unstable.” And whether the world must expect “great shakes” depends, to a large extent, on China. In any case, dozens of experts from various countries are writing about this.

For example, Asian analysts Andrew Sheng and Xiao Geng note that Credit in China is growing at a breakneck pace, having increased from 125 percent of GDP in 2008 to 215 percent in 2012. Local-government debt has soared by 70 percent since 2009, reaching almost 3 trillion dollars past June. This is raising serious concerns about the level of risk in China’s financial system. There are also disproportions in the real estate sector. The combination of easy credit, low official rates, and high demand caused property prices to surge by 300-500 percent in some Chinese cities over the past decade. The result was a 43 percent increase in shadow-banking credit last year, accounting for 29 percent of China’s total credit. In this situation, all hopes are being pinned on the reforms carried out by the Chinese government.

British journalist Ambrose Evans-Pritchard points out that China has a credit bubble worth 24 trillion dollars – 1.5 times larger than the US banking system, – and the pint is whether the government will now manage to deflate it gently with a skill that eluded the Fed in 1928, the Bank of Japan in 1990, and the Bank of England in 2007. Besides, China’s attempts to reduce its debt burden are “amplifying risks to growth.” In his words, past year China added 5 trillion dollars in new plant and fixed investment – as much as the US and Europe combined – flooding the global economy with yet more excess capacity. Therefore, the problem of deflation and the likely repetition of a “lost decade” along the Japanese lines, albeit on a global scale, is precisely in this.

Europe “entered” deflation in 2013. Eurostat says that Italy, Spain, Holland, Portugal, Greece, Estonia, Slovenia, Slovakia, Latvia, Denmark, Hungary, Bulgaria, and Lithuania have seen deflation since May. Basic prices abruptly fell in Poland and the Czech Republic in July and in France in August.

George Soros says in his latest report that the EU is heading for a lengthy stagnation which Japan is desperately trying to escape from. “The stakes are high: nation states can survive a lost decade or more; but the EU, an incomplete association of nation states, could easily be destroyed by it,” Soros says. Naturally, it is an exaggeration, bur the risks still remain.

Evans-Pritchard says: “Those who think deflation is harmless should listen to the Bank of Japan’s head Haruhiko Kuroda, who has lived through 15 years of falling prices. Corporate profits dried up. Investment in technology atrophied. Innovation fizzled out. ‘It created a very negative mindset in Japan,’ he said. Japan had the highest real interest rates in the rich world, leading to a compound interest spiral as the debt burden rose on a base of shrinking nominal GDP.”

The US looks the best so far, but there are no grounds whatsoever for an accelerated growth which would create a sufficient demand for the entire international economy. But, let me say it again, these trends were evident well before, and experts wrote about them a year ago.

As for Ukraine, a greater danger comes from domestic political risks that may lead to very bad long-term consequences. And the results of the 2005-09 domestic political confrontations, such as a radical hike in import dependency, growth of the foreign debt, and the incredible pressure of fuel prices on the economy, may turn out to be only the beginning of our economic problems. This is one of the important reasons why our political crisis should be settled quickly and peacefully.