Emerging Markets: Argentina Gold Going Crazy With a comparison to the Turkish Lira as well

The crisis in the emerging markets started with the Federal Reserve in the US announcing that it would “taper” its bond buying, a process that has been helping the US recovery. The announcement was made in May 2013, and the currencies of emerging market countries have been recoiling ever since.  The logic of the flow of funds away from emerging markets back to developed nations does hold; as quantitative easing is reduced, growth and normality return with interest rates rising back in the West, which become more attractive to investors that have been chasing emerging markets for the higher yields.

The latest effort to stabilize the currency is from Turkey, with the central bank deciding to increase its interest rates dramatically, to between 4.25% and 5.5%. Increasing the interest rate on offer naturally increases the value of the currency, as money will flow to the market which offers the best return. This increase in interest rates resulted in the Turkish lira appreciating nearly 8% against the dollar, though it is still down nearly 30% over this time last year.

The downside to increasing the central bank rate is that borrowing costs increase, and this can affect economic growth in the country. This concerns the Turkish Prime Minister, Recep Tayyip Erdogan, who opposed the increase in rates, and said that he would hold the central bank responsible for any effect on growth. This may have ramifications in the future, as it is not a good situation when the Prime Minister and the central bank disagree on a basic principle of policy.

The Argentine peso plunged in value last week, which made some commentators reflect on 2002 when the country defaulted on its debt, creating a financial crisis. This may impact other countries with trading ties to Argentina, such as Brazil.

The Feds continued to announce tapering, and it seems that this inevitably affects the emerging markets, at least in the minds of investors. The other factor is global growth, with the current news that China, which has been on an upward growth path for a long time, is now starting to see its economy slow.

With that said, some commentators are saying that the volatility on the emerging markets is an overreaction. Mark Mobius, the executive chairman of Templeton Emerging Markets Group, has stated that he feels the problems are temporary. He noted that money was flowing into emerging markets bonds before the tapering efforts. “As soon as tapering talk started, then everybody got cold feet and started to exit”, Mobius is reported as saying. He believes that the balance sheets of countries around the world are still sound, and that there is little reason for the selloff to be happening.