Earlier this week, investors got a rude shock from Brazil, which decided to impose a tax on foreign investment in a bid to cool its currency and reduce stock market froth. American investors who thought it might be fun to play Brazil through, say, the iShares MSCI Brazil ETF (EWZ), after seeing Rio win the Olympics, quickly took a 3% haircut.
Word to the wise. Brazil won’t be the last country to do this, as liquidity floods the world, and more emerging markets seek to slow down the excess.
Latin America, particularly Chile and Colombia, has a history of using capital controls. So does Asia – although usually to prevent outflows (as did the US, in the 1960s and 1970s). Potential European Union members are different. Capital mobility is a condition of EU entry. Given that no country used controls during the depths of the financial crisis, it is improbable that they will now.
In the past, capital controls often smacked of desperation. But the crisis has lifted the stigma of such interventions. Indeed, policies that cool down hot money can be cast as the kind of prudential and anti-cyclical measures now in vogue. In the developing world, faster-than-expected recoveries and rising interest rates could foment a vicious carry trade. Capital controls could yet make a comeback.
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