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The Reform Pattern of the EU Debt Crisis reaches the Emerging Markets
Dialogue with the Alter Ego on international currency turbulences, first drafted on Jan. 30, published on Jan.
31, 2014
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Question by Alter Ego of Noah denkt™ (AE): In the last couple of days markets have been spooked by the
Argentina currency crisis and the fear that subject crisis might spread to other emerging markets after the
FED’s tapering announcement. Meanwhile, however, the general consensus in the markets seems to be that
this is a passing storm and that only a few very badly managed emerging markets will continue to suffer from
the tapering effect in the US.  What is Noah denkt™’s position on this?
Answer by Noah denkt™ (Nd): We believe that markets won’t be able to shrug this off as easily as our first
intuition might have suggested.  Instead we fear that this could be the beginning of a more sustained period of
uncertainty surrounding the emerging market success story.

AE: Why do you say that?
Nd: Well, it seems to us that Brazil, for instance, which is currently been viewed as a pillar of emerging market
success is very much exposed to the negative effects of the Argentinean crisis.  Its current account balance
(-8677.60 Million US$) is trending negatively. Its foreign reserves are coming down; and the GDP growth rate
there is slowing down as well. Beyond that, however, we also need to recognize that Argentina is Brazil's 4th
biggest export and import market. And clearly there are huge structural deficiencies in Brazil - as in deed in all
other emerging markets (corruption, under performing educational system etc) - that may well come under
serious scrutiny in the coming months.

AE: So you are saying that if doubt spreads over Brazil, many other emerging markets won’t be able to duck
the negative fall-out from this as well.
Nd: Correct.

AE: Nevertheless, the bulk of statistics with respect to Brazil is positive. GDP is growing, unemployment is
coming down, labor costs are decreasing, the amount of external debt is falling, and foreign direct investment
continues to be high. And then there is the fact that the World Soccer Championship and the Summer Olympics
will soon be hosted in Brazil. It, hence, seems quite outlandish to believe that this country’s reputation could
come under serious threat.
Nd: It is possible that the international perception of Brazil’s credibility might save it from the fact that its
fundamentals aren’t as good as conventional wisdom has it. But this is a very thin ice we are treading here.
Because who would have thought just a week ago that India or Turkey might enter into turbulences. Let’s look
at India, for instance: Although its current account balance is negative the latter is still trending in the right
direction. At the same time, India's GDP is growing, its foreign exchange reserves are high, and its government
hasn’t made major mistakes in its economic and social management recently.  So why did its central bank have
to spike the interest rate in order to defend the national currency?

AE:  Because at the outset the emerging market storm was indiscriminate. As time goes by though, the markets’
view will become more differentiated and understand that not all emerging countries can be lumped in the same
basket.
Nd: We are not so sure about that. Instead it seems to us, as if the rescue pattern of the Euro debt crisis might
now spread elsewhere. In other words, it seems to become clear that it isn’t just
the Eurozone which is being
forced into major structural reforms by the fall-out of the devastating sub-prime crash, but that it is the world as
a whole which will have to augment its economic competitiveness in order to avoid a serious breakdown.

AE: So the sub-prime crash will bring about a major paradigm shift in economic, social and international
relations?
Nd: That is what it looks like now.
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Keywords:

currency crisis in emerging markets, European austerity come to emerging markets,
Euro-style structural reforms now need to be implemented elsewhere, austerity politics
come to emerging markets, worldwide austerity politics
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