Are Emerging Markets Now a Danger?
The domino effect.
It's a Theory
Economics is not my thing, although I did once enjoy a money and banking lecture from a former Bank of England official, who worked at the Bank in 1992 when hedge funds, led by George Soros, attempted to take down the English pound. As the official tells it, the Bank was publicly brave in its statements but privately terrified. Soros had it rattled. With good reason, too--because of hedge funds' selling pressure, the Bank was forced to devalue the pound by removing it from the European Exchange Rate Mechanism.
Martin Wolf of Financial Times, on the other hand, understands economics quite well. Unhappily, he has a disturbing thesis. In "The emerging risks of ticking time bonds," Wolf argues that investment managers have replaced banks as the danger zone of finance. Leaning on research from Princeton economist Hyun Song Shin, Wolf worries that the global investment community has become addicted to emerging-markets bonds. And vice versa--emerging countries have become addicted to readily available foreign capital.