A quick review of MSCI country indices for Argentina and Turkey as well as the MSCI Emerging Market index shows that large drops in equity returns are not that unusual. It also is not unusual to have equity declines occur in both Argentina and Turkey at the same time. What is different this time is the fact that the Argentina and Turkey are both down 50 percent through the end of August, but there has not been a broader crisis contagion. The last two deep country declines were during the Financial Crisis and the European Debt Crisis when global bank lending shrunk with economic growth.
Argentina and Turkey are both in the throes of "sudden stops" credit crises albeit based on different policy reactions and shocks. It is easy to focus on the unique situations for Argentina and Turkey, but perhaps the more important issue is whether these declines are signals of the beginning of a bigger credit crisis that will engulf more emerging market countries. We believe there are some countries that have extended current account deficits that place them at risk, but the overall dollar leverage in EM markets are a more relevant concern. Further increases in US interest rates may only increase the potential credit risk problem in EM countries who rely on dollar funding.
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