Other Than Argentina And Turkey, Emerging Market Countries Are In Better Shape To Withstand A Currency Crisis
“The Asian financial crisis, also called the "Asian Contagion," was a sequence of currency devaluations and other events that began in the summer of 1997 and spread through many Asian markets. The currency markets first failed in Thailand as the result of the government's decision to no longer peg the local currency to the U.S. dollar (USD). Currency declines spread rapidly throughout Southeast Asia, in turn causing stock market declines, reduced import revenues and government upheaval.” (Wikipedia)
A country experiences a currency crisis when there is serious doubt as to whether its central bank has sufficient foreign exchange reserves to support its exchange rate. Currency crises often arise for a variety of reasons, but quite often crises are caused by trade problems or political issues.
A country which feels that its currency is under attack can manage the attack better if its current account trade deficit is relatively small and, as well, if it has accumulated considerable sufficient foreign exchange reserves which it can use to defend the currency.
The chart which follows, which was created by the National Bank, suggests that most emerging market economies are in a much better economic shape currently than they were in 1997 when the Asian financial crisis started.
The chart indicates that many emerging market countries have sharply increased their foreign exchange reserves, and as well, in many cases they are recording smaller external deficits. Argentina and Turkey are obvious outliers from this rather comfortable conclusion.
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Weaker Currencies Are Generating Higher Interest Rates In Brazil And Turkey
The Brazilian and Turkish currencies have weakened sharply this year, making it very difficult to service these countries sovereign debts which are denominated in U.S. dollars.
The Brazilian currency recently weakened to about 3.90 Real per U.S. dollar.
Turkey’s central bank also unexpectedly increased its interest rates to defuse the weakening pressure on the country’s currency. Turkey’s central bank increased the one-week repo rate by 125 bps.The overnight lending rate was increased to 19.25%, while the overnight borrowing rate was increased to 16.25%.
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Disclosure: None.