The economic crises in Turkey and Argentina have led to talk of “contagion” – the risk of financial problems in one country spread to others.
Turkey has struggled with a falling currency and the worsening of relations with the united states.
A spiral of crisis in Argentina has led the government to announce austerity measures and to ask the International Monetary Fund (IMF) for an early version of a $50bn loan.
The sharp falls in the value of Turkish lira and the argentine peso has generated the fear that the currencies of South Africa to Russia will continue the game.
In Asia, India, the rupee and the Indonesian rupiah have already been affected.
Simply put, the spread is the realization of his process, in which the economic problems of a country prompted investors to sell assets in the economies with similar risks.
In a globalized world, a crisis in one country can also spread quickly to other people through trade links or lending of the banks.
That is why a downturn in Turkey or Argentina the affairs for the foreign – beyond to make holidays there cheaper.When you book a holiday? Turkey lira depression, he explainedWhy the confidence in the Argentine economy is decliningHow can the problems of propagation?
Trade is the obvious way to the problem in a country to affect another.
When an economy begins to falter, companies tend to cut production and then jobs. As a result, consumers have less money to spend on goods, including imports. This is bad news for the global companies that export a lot of goods to the country.
If the crisis also makes a country’s currency to weaken, the cost of imports rise, further hurting demand.
However, Joseph Gagnon at the Washington-based Peterson Institute for International Economics, says that Asia has “very low trade relations” with Argentina and Turkey, “so there is not much of a concern”.
Rajiv Biswas, Asia Pacific chief economist of IHS Markit, also says that trade with Turkey is a rare channel of contagion for Asia, as the region relies more on large emerging economies such as China, Europe and the US for their exports.
“The most important reason of concern for Apac [Asia-Pacific] nations would be if the Turkish economic crisis of the results on the spillover to emerging markets currencies and equities, which could trigger significant capital outflows from emerging markets,” he said.Why other emerging markets suffering?
The phrase “emerging markets” refers to developing countries in Africa, Latin America or Asia, while major economies such as the united states, the united kingdom and Japan tend to have higher levels of life and more developed financial systems.
During an economic crisis, investors tend to sell riskier assets, like emerging market currencies or shares, and more secure, as the us dollar or government bonds issued by major economies.
Julian Evans-Pritchard, a senior China economist for Capital Economics, says that countries that depend on money from abroad and foreign inflows of cash into their stock and bond markets are particularly at risk of infection.
“The risk is that when sentiment becomes more negative, foreign investors start to pull out those funds, that has an impact on the exchange rate,” he said.
“For the countries that borrowed a lot in foreign currency, usually in us dollars, this may make it difficult for them to pay their foreign currency denominated debt. That is what happened in 1997, during the Asian financial crisis, for example.”
Why have India and Indonesia been hit?
In Asia, India, and Indonesia rely heavily on foreign capital inflows, which is the reason why their currencies have suffered in particular.
India being an oil importing country, has seen its import bill rise along with higher oil prices and this has caused its current account deficit to widen, said Mr Biswas of IHS Markit.
A country that runs a current account deficit may depend on inflows of foreign money to finance spending and investment.
Indonesia, for its part, has few reserves of foreign exchange and a high level of foreign ownership in the local equity and bond markets, Mr. Biswas added.
This makes them particularly vulnerable to investors pulling their money out of the country.How about bank exposure?
Another form of contagion can spread is when banks in a country to which the goods in another country that is in trouble. The economic problems which can cause the value of these assets to fall.
When that happens, investors worry about how a bank will cope with the fall in the value of assets, and how this will affect their ability to lend money to consumers and other borrowers.
Such concerns weighed on European bank shares recently, with investors worried about how much Turkish assets that they possess.
The Financial Times reported that a wing of the European Central Bank was concerned about the exposure of some of the eurozone’s largest lenders to Turkey. The report said that Spain’s BBVA, Italy, UniCredit and the French BNP Paribas, all of which have important operations in Turkey, were particularly exposed.
The Spanish banks are the most exposed to Turkey, according to IHS Markit, citing data from the Bank of International settlements.
Have around €81bn of exposure to Turkish assets, and the French banks, the exposure to close to €35bn.
But IHS Markit’s Mr. Biswas, said the Asian banks ‘ exposure to Turkey was limited.
“In the landscape of the banking sectors of Asian countries, this would not be a serious negative factor in his perspective,” he said.