Turkey Is Not Contained

During my last appearance on CNBC, before I was banned several years ago, I warned that the removal of massive and unprecedented monetary stimuli from global central banks would have to be done in a coordinated fashion. Otherwise, there would be the very real risk of currency and debt crises around the world.  

However, coordination among central banks is not what is happening. The Fed is miles ahead in its reversal of monetary stimulus, as it has already raised rates seven times; with two more 25bps rate hikes in the pipeline scheduled for later this year. It has also avowed to sell off two trillion dollars’ worth of debt off its balance sheet–while the rest of the world’s central banks are far behind in this monetary tightening course. This has led to a significant increase in the value of the US dollar.

The strengthening dollar is placing incredible stress on the EM space, especially those countries that hold onerous dollar-denominated debt in conjunction with large current account and budget deficits. This is reminiscent of the Asia Debt Crisis that took place in the late 1990’s, which took Wall Street for a wild ride as well.

From 1985 to 1996 Thailand’s economy grew at an average of over 9% per annum. Those envious growth rates attracted “hot” money from around the globe and helped send the Debt to GDP Ratio soaring. During Thailand’s golden years, inflation was at bay, and the Thai baht was pegged to the dollar at 25 to 1. Then in May of 1997, the baht was hit with massive speculative attacks–the market sensed the blood in the water. On July 2, 1997, currency and debt pressure forced Thailand to suddenly break the peg with the dollar and let the currency devalue. This currency turmoil resulted in substantial depletion of Thailand’s official foreign exchange reserves and marked the beginning of a deep financial crisis that spread across much of East Asia.

In turn, Malaysia, the Philippines, and Indonesia also allowed their currencies to weaken, and market turmoil affected stock markets in Hong Kong and South Korea.