Wednesday, October 22, 2008

The Debts of the Lenders: Bears Engulf Emerging Markets Part 2

In addition to the barrage of problems I already outlined, emerging markets face additional risk.

Chiefly, emerging markets remain EXTREMELY vulnerable to political risk. Most emerging markets are built on fragile politics. The majority either retain authoritarian governments or infant democracies. The social fabric, thin at the best of times, is becoming stretched to the breaking point. Extremely wide gulfs between poor and rich, rising inflation, and rising unemployment (tied to collapsing commodity prices) lead to increased potential for violent riots. This is the stuff of revolutions.

Additionally, companies in emerging markets are facing margin calls from wrong sided bets on $200/barrel oil, $9/corn, and other stratospherically priced commodities. It seemed like a smart idea back in June when inflation and a weak dollar were the impetus behind commodities' rally. However, in the current deflationary spiral they spell doom.

Finally, emerging markets are burning their foreign exchange reserves of dollars and euros to defend a run on their own currencies. While the wealthiest nations such as Russia and the Muslim petro states have acquired an impressive hoard, others are not so fortunate. Nigeria, Indonesia (no longer an OPEC member), and all of Eastern Europe and South America face a severe cash crunch.


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