The Fragile Five

 

Linda Yueh considers how the withdrawal of cheap US money will affect large emerging economies

Whilst tapering the cheap cash injections and an end to the Fed's economic stimulus could begin to spell a return to normality for the US economy, it could have serious ramifications for five large emerging economies in particular.

Dubbed "The Fragile Five" by Morgan Stanley, these are the countries judged to be most at risk when tapering finally begins. The group includes Indonesia, South Africa, Brazil, Turkey and India.

What do they all have in common? Well, they all have large current account deficits - the broadest measure of the trade gap - which means that they rely on external financing.

So, these countries have relied on money flowing into their borders, and now that investment may leave when the end of the era of cheap cash looms. I have written about this Great Reversal of cash before.

Plus, foreign investors are worried about political risk because all five have elections set for next year. That raises uncertainty.

Perhaps one reassuring thought is that there has been some time for these economies to prepare for the inevitable end of cheap cash. Unlike prior crises where the money left quickly there is no "sudden stop" of cash this time. After all it's been five years since the financial crisis and the Fed can't inject money into the economy forever.

As for the end of this era of cheap cash, it may be next month, December or perhaps January when Fed chairman Ben Bernanke leaves office.

The key question is whether there has been enough time for the rest of the world to prepare their economies for the inevitable.

 
Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this
    +2

    Comment number 12.

    That assumes the Fed actually do taper. I think they will continue to threaten it but when the time comes bottle it for fear of the bond markets.

  • rate this
    +1

    Comment number 11.

    how the withdrawal of cheap US money will affect large emerging economies......

    Cheap US money=toliet paper, thanks, no more

  • rate this
    +1

    Comment number 10.

    It should be clear to everyone by now that the Fed cannot taper. It is trapped by bond yields, a weak economy and the housing market. The only outcomes possible are debt default or hyperinflation. So please stop the propaganda.

  • rate this
    +2

    Comment number 9.

    #3.ken1760
    "There's clearly no such thing as "cheap money". Somebody somewhere at sometime ends up paying the bill and it is usually the working taxpayer"

    ...and also the savers who prudently accumulate cash for their retirement. The inflationary & currency depreciation policies currently run by the Fed & BoE are already effectively stealing savers' funds.

  • rate this
    +1

    Comment number 8.

    Let's face it, Linda, the foundations of these 5 mismanaged economies were never sound. Their bubbles of "success" have been a pure monetary phenomenon - US$ flooding the world, pushing up commodity prices & remittances to the 3rd world. When the e-printing presses are finally tapered off, it will be poverty-as-usual & a return to quiet desperation in these 5 countries.

 

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