Quantitative easing (QE) refers to large-scale asset purchases by the US Federal Reserve to inject liquidity in the world’s biggest economy after the onset of the global financial crisis in late 2008. In September 2012, stubbornly high US unemployment and faltering economic growth prompted it to launch QE3, under which it planned to buy US$40 billion worth of bonds per month, with no set end date. As of late 2012, it had bought some US$2.3 trillion in long-term securities. In December 2012 it announced it was increasing its purchases to US$85 billion a month.
Easy come, easy go as emerging markets discover with US Fed tapering
During the financial crisis, the major emerging markets escaped the damage from the United States and European Union relatively unscathed. Not any more. The rout in the capital markets of the emerging economies in the past week is a reminder that many of them face serious problems from heavy government debt to large current account deficits. In a sense, it was a continuation of the mayhem they experienced during last summer, when talks about tapering by the US Federal Reserve were first raised.
Ironically, it was unorthodox monetary policy pursued by the Fed, most notably its quantitative easing, to prop up the US economy that has helped sustain the emerging markets by creating a tsunami of liquidity during the crisis. That is why tapering has sent their currencies and equity markets into a tailspin. Now that the tide is turning, some are found to be wanting. Political instability in countries such as Egypt and Thailand does not help matters.
Of course, not all emerging markets are in the same negative category. Indonesia, India and South Korea are in better shape than, say, Argentina or Turkey, which is mired in a political stand-off over corruption.
The plunge in the Argentine peso has been compared to the collapse of the Thai baht in 1997, which triggered the Asian financial crisis. That may be an exaggeration, but there is panic in the air.
Foreign investors take flight at the slightest sign of trouble and do not necessarily distinguish between shaky and worthy emerging markets. Slower growth and mounting debts within the shadow banking system in China have also spooked investors and policymakers.
What is clear is that the Fed, the world's most powerful central bank, will have trouble unwinding its massive bond-buying exercise without causing disruption to the world economy. And the emerging markets are bearing the brunt of that disruptive force.