It began with Turkey and now it has started to spread as emerging market currencies tumbled last week. The markets were rattled yet again as the Turkish lira, the Argentine peso, the Indonesian rupiah and the Indian rupee all fell to recent lows. The negative sentiment is weighing on other Asian currencies and investors are nervous as one currency after another falls, forcing governments to raise interest rates to contend with inflationary pressures and capital outflows.

The Emerging Markets Currency Index has declined 2.1 % in August, for its fifth straight monthly loss, and has tumbled 5.1% since the beginning of this year. As the accompanying chart demonstrates, the currency devaluations in major economies have been very deep and potentially destabilizing.

After a short break since the Turkish crisis hit, the emerging markets' currencies started to decline, unabated. Now, Brazil, South Africa and Indonesia are within the crosshairs of investors who are watching very carefully as these countries adopt monetary and fiscal measures to build confidence. In a response to a plunge in the peso, the Argentinian government raised its bank rate to an unprecedented 60%, a desperate move in response to an annual rate of inflation that soared to 30%. The IMF has come to the rescue with a huge $50 billion loan but Argentinians are very weary of the IMF conditions after suffering greatly under its austerity program in the 2001 bailout. Argentina is under great pressure to meet its external financing obligations which amount to about $80 billion of which about 80% is denominated in dollars. That debt burden is worsening as the peso fell a further 7% last week. The government has stated it will reduce energy subsidies and slash public expenditures, but such measures only make it more difficult for Argentinians to contend with runaway inflation.  At the moment, Turkey and Argentina are alternating positions as the worst performing currency.

Indonesia has entered the picture as its currency fell to a three-year low and within striking distance of the record low since the 1998 Asian crisis. The Indonesian economy suffers from conditions all too familiar in major EMs. It's a current deficit running at $2 billion, the highest level in more than five years. Its external debt /GDP is running at 35%, one of the highest in Asia. The central bank has intervened directly, raising its benchmark lending rate by 125 bps to 5.5% and investors expect further rate hikes. While Indonesia does not appear to be in such dire straits compared to Turkey and Argentina, nonetheless continued pressure on the rupiah will take its toll. India, too, now feels the effects of this contagion, as the rupee suffered its worst monthly loss in over three years, falling to an all-time low against the dollar.

It is no coincidence that all these currencies are tumbling at the same time. If we have learned anything from past financial crises it's that the markets are highly integrated and investors are more capable than ever to vacate a currency or asset class very quickly. Emerging market equities have lost 3% just this past week alone. Fleeing investors can set off a chain of events that can spread widely, especially in markets where there are large current account deficits coupled with high levels of external debt. Stay tuned, this story has more episodes to come.