Good news on jobs in America may have troubling repercussions for emerging markets
IN FINANCE as in medicine, prevention is better than cure. The International Monetary Fund's Global Financial Stability report, published on Tuesday April 6th, is the equivalent of a twice-yearly check-up for the international financial system. At the moment, the system seems to be in rude health, the report says. The IMF does worry, however, that proper precautions for the future are not being taken. Unfortunately, in finance as in medicine, no one listens to the doctor until nasty symptoms start to show.
As the report confirms, the past 12 months have seen the re-emergence of emerging markets. A strengthening world economy has rediscovered an appetite for their goods, and a raging thirst for their bonds. Spreads--the premium creditors demand from emerging-market governments, over that asked of more trusted governments--have fallen dramatically, despite rising somewhat in February (see chart above).
Brazil's turnaround has been among the most dramatic. As a presidential candidate in 2002, Luiz Inacio Lula da Silva struck fear into the hearts of Brazil's foreign creditors. But as president, in 2003, he raised $4.4 billion from them. Even Indonesia, laid low by the Asian financial crisis in 1997, got back on its feet in March with its first bond issue for eight years.
The IMF publishes the Global Financial Stability report. The Institute for International Economics publishes research and analysis on emerging-market economies. See also the World Bank. The US Treasury Department provides news and information on the financial markets, including securities, Treasuries yields and public debt. The Federal Reserve sets monetary policy.
What explains this renewed enthusiasm for emerging markets? Their "fundamentals" have certainly improved. Exports are strong, public finances are more stable, and currencies more flexible. Countries that once sought to maintain currency...