Was it Turkey’s “executive presidency” and its unwillingness to hike rates in the face of soaring inflation? Or maybe the record global debt accumulated over the past decade? Maybe the artificially low interest rates? Or perhaps it was the pervasive current account deficits amid easy outside capital. How about the rapid slowdown in China, its escalating trade war with the US, and the Yuan devaluation? Or perhaps it’s just the rising US interest rates and global quantitative tightening soaking up billions in excess liquidity?
However one justifies the current emerging market crisis, one thing is clear “virtually everybody knew this was coming“.
At least that’s the common theme according to SocGen’s Albert Edwards, who after an extended absence has returned, with a new note looking at the turmoil gripping the EM sector. It’s hardly new territory for the SocGen strategist, who prior to his current role, was most famous for his correct predictions and observations on the Asian Financial Crisis of 1997.
Fast forward some 21 years, when the veteran SocGen strategist believes the current turmoil boils down to two things: the Fed’s ongoing tightening – a point we discussed earlier this week in “Forget About Turkey: Asia Is The Elephant In The Room” – and China’s rapid devaluation. Turmoil, which as Forget About Turkey: Asia Is The Elephant In The Roomnoted previously, is about much more than just Turkey, which is merely the symptomatic “tip of the iceberg.”
Here’s Edwards’ take on where we stand:
Many commentators have thought for some time that Turkey was a macro-accident waiting to happen. But the key issue is not Turkey’s idiosyncratic macro problems. The unfolding crisis in EM is the direct result of Fed tightening and the strong dollar. The Fed always raises rates until something breaks. But Turkey breaking will not be enough to derail this Fed’s tightening mission. But what is the significance of China’s ongoing devaluation in the face of rapidly weakening growth and trade tensions? Is that also playing a role in draining global liquidity from the financial markets?
And speaking of Turkey, nothing that is taking place now should be a surprise: after all, until the recent diplomatic spat, all the same trends were in place – sliding currency, rising inflation, surging USD-denominated debt, gaping current account deficit…. In fact, if one did not see the Turkey crisis, they should probably look for a job outside of finance (like this Barclays bond trader for example). This is how SocGen’s Alvin Tan summed up the current crisis in Turkey:
“A textbook currency crisis is unfolding in Turkey. Large and widening current account deficit, check. Growing foreign currency debt, check. High and rising inflation, check. Constrained monetary policymaking, check. Just as King Canute could not stem the waters by ordering the tide to stop, a country with a 6% current account deficit and 15% inflation will be powerless to stop its bonds and currency sliding without hiking interest rates and/or restricting capital outflows. The triggers may be unique, but the crisis in Turkey is all too familiar, and the required policy response is too.”
What’s more, Edwards says that in the same way that the Asian crisis and the subsequent 1994 Mexican Peso (Tequila) crisis were wholly predictable, so too was this crisis, even though Turkey?s has a unique vulnerability has stood head and shoulders above other EM countries for some time, the same one we discussed in “16 Billion Reasons Why Turkey’s Currency Crisis Will Become A Debt Crisis”.
As we first noted yesterday, Edwards echoes that “Turkey has discovered that high and rising foreign-denominated debt never sits well with a huge current account deficit and a reluctance to raise interest rates.”
And while there is no easy way out for Turkey, especially with some $16 billion in USD-denominated debt maturing by the end of 2019 and an economy in which rate hikes are forbidden…
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