Australia, as a large borrower will not be immune to another financial crisis.
Fancy a trip to Turkey? It’s nice at this time of year and you too could marvel at what could be the next financial crisis unravelling.
What’s more, the lira is as cheap as chips, although that’s part of the problem. Currencies in many emerging markets are being battered, with the Argentine peso plunging 16 per cent so far this year.
So what’s that got to do with us? Nothing and everything, as the 1997 Asian or the 2007 global financial crisis showed. We know it’s always something from left field that triggers a financial run from which Australia, as a large borrower, is not immune.
Maybe it won’t be Turkey, which last week had to double its key interest rate, but there are enough vulnerable countries for the problems each one has to come together in another global exodus of capital.
All have some political problem, invariably with corruption at its root, along with an economic one such as too much debt, high inflation or a dangerous current account deficit, and often all three. They include Brazil, Russia, South Africa, India and Indonesia, which Abbott would do well to note.
The rug is being pulled from under them by the United States Federal Reserve. It has been pumping extra dollars into the US economy, funding the world’s biggest carry trade. This is banks borrowing at a low interest rate in the US – in fact, at almost none at all – and investing it in bonds, stocks or commodity futures that earn much more.
This carry trade is also why the dollar hasn’t dropped further.
But the Fed confirmed last week that it would continue what it calls tapering this down. The T-word is making Wall Street inordinately jittery, even though it’s a plus that the US economy has recovered enough to come off life support. Still, it doesn’t want to lose its sugar hit of near zero official interest rates and increasing amounts of easy money looking for a home.
The key difference between 2013 and 2014 is that the US will be driving world growth again. Better still, the Fed has told the market it’s not about to raise interest rates, either. In fact, they’re falling as money flees emerging markets for the safe haven of US bonds. Their yields are the benchmark for setting mortgages.
Yet falling yields aren’t what you’d expect from tapering, considering it’s achieved by the Fed buying back fewer government bonds. You’d think less demand would lower bond prices, which increases their yield.
Either way, they’ll determine our sharemarket, currency and interest rates this year. While Wall Street is due for a correction anyway, expect tapering to lift the US dollar and pull our dollar down. Even our interest rates have been falling slightly, although the Reserve Bank hasn’t done anything, and won’t at Tuesday’s meeting. And, if US bond yields stay down, this will discourage money from fleeing the Turkeys of the world.
via Turkeys targeted as next crisis brews.