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

Investors 2 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: contagion 3.

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 affected 4. 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 makers 5, there is agreement about why emerging markets are in trouble. They largely blame three developments:

1. – Investors are worried about U.S. President Donald Trump 6'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 tighten 7 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 Economist 8 says the weakness in emerging-market currencies does not have to be contagious 9. It could be contained, and does not have to threaten the solvency 10 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 investor 1 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 monetary 11 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