We are indebted to one of our correspondents, a man of wide and varied interests but with a background as a senior executive in the insurance industry, for the heads-up on the warning from the IMF, in its latest Global Financial Stability report, that there is a real danger that very high levels of borrowing by corporate entities in emerging markets, which has built up beneath the radar because of low interest rates and the actions of central banks in making cash available for lending, could have such far-reaching effects as to create another global financial crisis.
The warning, on what could be the eve of the start of an interest rate increase cycle in the US – the first in a decade - brings back memories of what became known as the ‘taper tantrum’. What happened was that the then head of the Federal Reserve, Ben Bernanke, made remarks, in May of 2013, to the effect that Quantitative Easing (QE) in the USA would soon be reversed in a gradual fashion, or ‘tapered’. However, news like this needs to be fed very carefully and very gradually to the markets. The result of Mr. Bernanke’s remarks on that occasion was a sudden and strong rise in US treasury yields (see chart above), and very serious problems for the currencies of emerging markets, which were aggressively sold in anticipation of an increase in US interest rates. As mentioned, this quickly became known at the time as the ‘taper tantrum’. And it turned out to be a false alarm, as US interest rates have, even over two years later, still not started to rise.
But now the IMF is worried that what was feared then is now about to come to pass. It would appear that they have a point.
Are Yellen et al learning from the Bernanke gaffe?
We have noted here the on-again, off-again nature of the current Fed regime’s approach to raising interest rates, now that QE has been confined to history, at least in the US. The members, and in particular the chair of the FOMC, Janet Yellen, have often said that the issues attached to emerging markets are not their concern, as their mandate is to do whatever is necessary to create employment, with due regard for inflation, in the US.
However, in a global economy, what happens in other jurisdictions does matter as far as US domestic wellbeing is concerned – especially when one of those so-called emerging markets has the economic power that is now concentrated in the governing class in Beijing.
The current apparent gross indecision on the part of the Fed, combined with many and varied briefings in a great number of speeches by FOMC members, could turn out to be nothing more than elaborate stage-management designed to head off a repeat of the taper tantrum of 2013.