Falling Currencies Lead to Fear of Contagion

 

Fear is growing in financial markets around the world.

First, it was Argentina. Then came Turkey, South Africa and Indonesia

Investors² and policy-making officials are worried about the falling value of currencies of several emerging markets. Most of these developing countries have borrowed a lot of money, often in United States dollars.

As the value of their national currency falls against the dollar, the amount they have to repay grows larger.

This has caused fears of a repeat of the 1997 Asian financial crisis or of Mexico’s financial crisis in 1994.

Why? One word: contagion³.

Contagion means that economic concerns move from one country to another, bringing down currency values and stock markets. Contagion could affect every country in the world.

The value of Argentina's money, the peso, fell 29 percent against the U.S. dollar in August. Next, Turkey's currency lost 25 percent of its value. South Africa's rand had an almost 10 percent drop. The Indonesian rupiah fell to its lowest level since 1997. India's currency also fell.

Now September has arrived, and those currencies are still down. The Turkish lira is now down 40 percent against the dollar. Turkey’s private banks and businesses have large debts in dollars and there is concern they might not have the money to repay those debts.

Foreign exchange markets are nervous. Traders are worried more countries may be added to the list. They are looking at African nations like Angola, Ghana, Ethiopia and Mozambique.

Another example is Iran. The Iranian currency has fallen more than 140 percent since the United States withdrew from the 2015 nuclear deal four months ago. Oil companies and other industries have been forced to leave Iran and the economy is in trouble.

Even some of the world’s more developed economies may be affected⁴. Financial experts are closely watching Chile, Poland and Hungary. They say those three countries have foreign currency debts above 50 percent of Gross Domestic Product (GDP).

Private, non-government, debt in emerging and developing countries is larger than it was during the 2008 financial crisis.The bigger the debt, the harder the fall.

"The risk is increasing in those countries," warns Bertrand Delgado, director of international markets for Societe Generale in New York.

Among investors and policy makers⁵, there is agreement about why emerging markets are in trouble. They largely blame three developments:

1. – Investors are worried about U.S. President Donald Trump⁶'s trade war with China and other countries.

2. - Rising U.S. interest rates have made investors pull their money from emerging markets and put it into dollar investments.

3. – After the 2008 financial crisis, the U.S. Federal Reserve and the European Central Bank increased the supply of money to help with the economic recovery. Now they have begun to tighten⁷ the money supply. There is less money to borrow, and it costs more to borrow it.

A financial crash?

Marcus Ashworth of Bloomberg said last week that the emerging-markets situation looks like contagion.

"The difficulties for emerging markets have entered a new phase,” he said, adding that contagion is moving to other countries.

Other market watchers are less worried. They believe each country with falling currencies have their own problems that are causing the situation. But they agree that another interest rate rise by the U.S. Federal Reserve could change everything.

Recently, the Singapore-based financial services group DBS sent a note to investors. It warned that Argentina and Turkey are struggling to pay their loans back in dollars. It added that “trade tensions” could cause financial “instability” in these countries.

Britain's The Economist⁸ says the weakness in emerging-market currencies does not have to be contagious⁹. It could be contained, and does not have to threaten the solvency¹⁰ of large Western Banks.

Others agree. They point to the many strong emerging-market economies.

At the end of June, India's GDP was growing at an 8 percent rate. Mexico's peso is calm. Mexico seems to have ended its trade talks with the Trump White House agreeably. That makes investors happy.

Some experts say the fear of contagion comes from the international media and is not real. They point out that when the Federal Reserve first raised rates in 2013, currency values in most of these countries fell. Then they recovered.

The great unknown in understanding contagion is investor¹ emotion. Investors could panic and pull out all their money from these countries. If that happened too suddenly, contagion would be very possible.

I’m Susan Shand.

Words in This Story

currency – n. the money that a country uses

emerging-market - adj. description of a country whose economy is still developing

contagion – n. the act of moving from one place to another

Gross Domestic Product – n. the monetary¹¹ value of all goods and services produced within a country over a period of time

phase – n. a part or step in a process

instability – n. the state of being likely to change for the worse

solvency – n. the state of being able to pay debts

panic – v. to be overcome with extreme fear

1 investor   

n.投资者，投资人

参考例句：

• My nephew is a cautious investor.我侄子是个小心谨慎的投资者。
• The investor believes that his investment will pay off handsomely soon.这个投资者相信他的投资不久会有相当大的收益。

2 investors   

n.投资者，出资者( investor的名词复数 )

参考例句：

• a con man who bilked investors out of millions of dollars 诈取投资者几百万元的骗子
• a cash bonanza for investors 投资者的赚钱机会

3 contagion   

n.(通过接触的疾病)传染；蔓延

参考例句：

• A contagion of fear swept through the crowd.一种恐惧感在人群中迅速蔓延开。
• The product contagion effect has numerous implications for marketing managers and retailers.产品传染效应对市场营销管理者和零售商都有很多的启示。

4 affected   

adj.不自然的，假装的

参考例句：

• She showed an affected interest in our subject.她假装对我们的课题感到兴趣。
• His manners are affected.他的态度不自然。

5 makers   

n.制造者，制造商（maker的复数形式）

参考例句：

• The makers of the product assured us that there had been no sacrifice of quality. 这一产品的制造商向我们保证说他们没有牺牲质量。
• The makers are about to launch out a new product. 制造商们马上要生产一种新产品。 来自《简明英汉词典》

6 trump   

n.王牌，法宝；v.打出王牌，吹喇叭

参考例句：

• He was never able to trump up the courage to have a showdown.他始终鼓不起勇气摊牌。
• The coach saved his star player for a trump card.教练保留他的明星选手，作为他的王牌。

7 tighten   

v.(使)变紧；(使)绷紧

参考例句：

• Turn the screw to the right to tighten it.向右转动螺钉把它拧紧。
• Some countries tighten monetary policy to avoid inflation.一些国家实行紧缩银根的货币政策，以避免通货膨胀。

8 economist   

n.经济学家，经济专家，节俭的人

参考例句：

• He cast a professional economist's eyes on the problem.他以经济学行家的眼光审视这个问题。
• He's an economist who thinks he knows all the answers.他是个经济学家，自以为什么都懂。

9 contagious   

adj.传染性的，有感染力的

参考例句：

• It's a highly contagious infection.这种病极易传染。
• He's got a contagious laugh.他的笑富有感染力。

10 solvency   

n.偿付能力，溶解力

参考例句：

• Fears about the solvency of the banks precipitated the great economic crash.对银行偿付能力出现恐慌更加速了经济的崩溃。
• Their targets,including profitability ratios,solvency ratios,asset management ratios.其指标包括盈利比率、偿债能力比率、资产管理比率。

11 monetary   

adj.货币的，钱的；通货的；金融的；财政的

参考例句：

• The monetary system of some countries used to be based on gold.过去有些国家的货币制度是金本位制的。
• Education in the wilderness is not a matter of monetary means.荒凉地区的教育不是钱财问题。