Very rapidly the story is changing from the US financial crisis to the economic crisis in emerging markets. Export-heavy nations are highly exposed to demand in developed economies (conversely, Europe is highly exposed financially to emergin markets), so there’s no separating the two. This story has been brewing for a while, but it really started picking up this week, and today George Soros weighs in with a piece in FT. He argues that America — already undertaking a complicated plan to bail out itself — needs to lead a bailout of emerging markets. The subtext is not just that an emerging market bailout is necessary for the health of the global economy, but that the future of capitalism depends on it, that emerging markets such as Brazil et. al. have followed international prescriptions, adopted austerity measures and that a crash would dissuade them permanently from these ideals:
The emerging market crisis of 1997 devastated the periphery such as Indonesia, Brazil, Korea and Russia but left America unscathed. Subsequently, many peripheral countries followed sound macroeconomic policies, once again attracting large capital inflows, and in recent years have enjoyed fast economic growth. Then came the financial crisis, which originated in the US. Until recently peripheral countries such as Brazil remained largely unaffected; indeed, they benefited from the commodity boom. But after the bankruptcy of Lehman Brothers, the financial system suffered a temporary cardiac arrest and the authorities in the US and Europe resorted to desperate measures to resuscitate it. In effect, they resolved that no other big financial institution would be allowed to default and also they guaranteed depositors against losses. This had unintended adverse consequences for the peripheral countries and the authorities have been caught unawares. In recent days there has been a general flight for safety from the periphery back to the centre. Currencies have dropped against the dollar and the yen, some precipitously. Interest rates and credit default premiums have soared and stock markets crashed. Margin calls have proliferated and spread to stock markets in the US and Europe, raising the spectre of renewed panic.