The current problems are not all that different than what we saw during the 1997 Asian Financial Crisis. The big difference is that the key players in this crisis are not only running much larger current account deficits than they were in 1997, but they’re simply more important economies. The following chart via Cardiff Garcia at the FT shows the comparison of the key players relative to 1997:
In my view, it’s not Turkey, South Africa or Indonesia that should concern us all that much. It’s not that these countries aren’t substantial, it’s just that the problems driving the crises in these nations could also drive much more important countries into crisis. In a lot of ways, this is like looking at the Euro crisis. It’s not Greece that’s really that concerning. It’s Greece leading to problems in Italy, Spain or another key player that would break the floodgates. And in this case, what we have is a group of countries that have experienced asset price booms, overinvestment and overvaluation of assets via various forms of financial intermediaries which has coincided with growing current account deficits and potential currency crises. And the lynchpin in much of this is China because they’re the driver of much of the foreign demand that has driven the booms in these countries. In other words, so goes China so goes these emerging markets.
But we shouldn’t panic just yet. As Pawel Morski noted, this is hardly a “crisis” just yet as there are few signs of domestic debt problems. After all, if we start to see real contagion we’ll likely see credit spreads in emerging markets begin to blow out more broadly. That’s not happening just yet: