That Escalated Quickly: The Emerging Market Currency Crisis Of 2018 Threatens To Destabilize The Entire Global Financial System
We haven’t seen emerging market currencies crash like this in over a decade, and analysts are warning that if this continues we could witness a devastating global debt crisis. Over the past decade, there has been an insatiable appetite for cheap loans in emerging market economies, and a very substantial percentage of those loans were denominated in U.S. dollars. When emerging market currencies crash relative to the U.S. dollar, lending dries up and servicing the existing loans becomes extremely oppressive, and that is precisely what we are witnessing right now. This week, most of the top headlines in the financial media have been about the crisis in Turkey. The Turkish lira fell another 8 percent against the U.S. dollar on Monday, and it is now down about 35 percent over the past week. Overall, the lira has fallen 82 percent against the U.S. dollar in 2018, and this is putting an enormous amount of stress on the Turkish financial system…
“It is about credit, since Turkey has been a huge borrower in global capital markets over the past number of years when the world’s central banks were encouraging investors to stretch for yield,” David Rosenberg, chief economist and strategist at Gluskin Sheff, said in his daily market note. “Over half of the borrowing is denominated in foreign currencies, so when the lira sinks, debt-servicing costs and default risks rise inexorably.”
Turkey’s economy, just like all of the other major economies around the world, is utterly dependent on the flow of credit, and now lending is becoming greatly restricted.
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