Beware the Coming Emerging Market Bust, Warns Banking Group

Davos Emerging Market BustBy DAVID MCHUGH

ZURICH -- A leading lobby group for the world's financial institutions is warning investors not to get caught flat-footed in emerging markets if rich-country central banks end their easy and cheap money policy of the past few years.

The Institute of International Finance said Tuesday that the withdrawal of massive stimulus by the U.S. Federal Reserve and other central banks could lead to a "boom-bust cycle" in emerging markets if investors are unprepared.

"The risk of market participants being unprepared for a reversal of rates is real and needs to be seriously considered to avoid disruption," the IIF said.

Low interest rates around the world over the past five years have boosted investments into faster-growing emerging countries -- where money can earn a better return.

The IIF sounded its warning in a report ahead of the World Economic Forum in Davos, Switzerland, where some 2,500 business and political leaders are gathering to discuss economic risks ahead this year.

The IIF predicted that falling unemployment and an improving economy in the United States may lead the Fed to start withdrawing some of its easy money policy in 2014. In order to shore up the economy in the face of an acute banking crisis, the Fed has cut its main interest rate to near zero percent and pursued policies which have greatly expanded the money supply.

Many other banks around the world cut their interest rates to record lows too and have backed policies to make up for the drying up of private sector credit that has been one of the hallmarks of the global economy over the past few years. Despite subdued economic recoveries around the world, many economists say such policy action prevented a repeat of the 1930s.

So far, there are few indications that the world's central banks are about to change course anytime soon. On Tuesday, the Bank of Japan bowed to pressure from government to raise its inflation target that will likely mean it has to increase its money supply, while the European Central Bank and the Bank of England are both under pressure to do more to help their ailing economies.

In its report on investment flows into emerging markets, the IIF said most emerging market governments may have the foresight to avoid the pitfalls of boom and bust. However, it said investors and some governments may not be so careful, leading to unexpected losses and market turmoil.

The institute suggested rich countries should coordinate rate policy -- and that failure to do so risks undermining investor confidence and more market turmoil.

The rise in flows have made many uneasy in developing countries, since the inflows can lead to rising exchange rates for the countries that are on the receiving end. The higher exchange rates have the potential to hurt their exports.

The IIF said Tuesday that capital flows to Latin America and emerging Asian economies such as China, Indonesia and India are now 30 percent above the level in 2007, before the global financial crisis.

It raised its figure for capital flows for 2012 to $1.080 trillion from $1.026 trillion estimated in October and said money movements picked up sharply in the last months of 2012 and will likely rise in 2013 to $1.118 trillion and again in 2014 to $1.115 trillion.

The IIF, which is based in Washington, D.C., has 450 members, including major global commercial and investment banks, insurance companies, investment funds, hedge funds, and other finance-related institutions.

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bchrist751

By the time money trickles down to the Democrats the economic up cycle is mostly over with... Democrats are the last to benefit and the first to lose their Jobs...

January 24 2013 at 1:54 PM Report abuse rate up rate down Reply
levmebe69

Wall street gets the "easy money" We get the crap heap.

January 24 2013 at 1:00 PM Report abuse +2 rate up rate down Reply
2 replies to levmebe69's comment
dembaitnswitch

What stopped you from playing the stock market ?

January 24 2013 at 1:22 PM Report abuse +2 rate up rate down Reply
1 reply to dembaitnswitch's comment
juststeve35

Intelligence.

January 24 2013 at 4:19 PM Report abuse +1 rate up rate down
parkerntx2

we get the hope and change.

January 25 2013 at 3:01 AM Report abuse rate up rate down Reply
Roy Long

gop? you obammy welfare freeloaders crack me up,as they said in jonestown..dont drink the koolaid

January 24 2013 at 9:37 AM Report abuse rate up rate down Reply
jrb359

It's coming folks. Brought to you by the Democrats that YOU elected. You know the party of higher taxes, more wasteful spending, higher deficit, and less liberty's.

January 24 2013 at 6:17 AM Report abuse +1 rate up rate down Reply
jamesstevens39

maybe all you smart people should have been saying this during Bush's terms, the GOP is the very reason we are in this mess, and now they don't want to pay, and the people are drinking the GOP's koolaid any longer, the rich need the rest of America more than the rest of America needs them, they better be shaking in their shoes, and deciding to do what is right, instead if being greedy pigs

January 24 2013 at 1:18 AM Report abuse -1 rate up rate down Reply
2 replies to jamesstevens39's comment
dembaitnswitch

Where's all the hope and change Barack promised ?

January 24 2013 at 12:36 PM Report abuse +2 rate up rate down Reply
parkerntx2

Just where do you think that your job came from? The job fairy? The rich can leave and relocate into another country can you?

January 25 2013 at 3:03 AM Report abuse rate up rate down Reply
jamesstevens39

revolution is near, I can feel it the rich white men want it all

January 24 2013 at 1:15 AM Report abuse -5 rate up rate down Reply
4 replies to jamesstevens39's comment
jamesstevens39

the GOP want children uneducated, grannies and paw paws to go on and die so they don't have to pay what they own them, so they can get these seats and profit off of them, while starving the little people, these people paid into SS their whole lives and the rich white men want this money to to embezzle

January 24 2013 at 1:13 AM Report abuse -3 rate up rate down Reply
kip

Is this just another doomsday scenario to scare the little guys??????

January 23 2013 at 11:33 PM Report abuse rate up rate down Reply
dencuddy

Aren't these the same guys that rigged the LIBOR rates? Why aren't they in prison?

January 23 2013 at 7:41 PM Report abuse rate up rate down Reply
toni

WE are earning depression interest in savings and bank account while taxes are high. if you want to teach you child about saving its a lost cuse, the fees for not having enough money in there accont mkes it minus account. how in the heck did we get in this boat??

January 23 2013 at 5:38 PM Report abuse rate up rate down Reply
2 replies to toni's comment
bchrist751

The way to wealth creation is still the same... Savings, compound interest and time. so simple but most will never do what is necessary...

January 24 2013 at 1:59 PM Report abuse rate up rate down Reply
parkerntx2

derivatives

January 25 2013 at 3:04 AM Report abuse rate up rate down Reply