The G8, the bond bubble and emerging threats

A policeman walks past a sign pointing to the Lough Erne Resort - location of the G8 summit The G8 gathering in Northern Ireland is unlikely to excite global markets

G8 leaders meeting in Northern Ireland this week can hardly ignore the ructions in financial markets, though they are not really supposed to do anything about them. These days, the big decisions about the future of the world economy are supposed to be left to the G20.

But when it comes to the global bond market, the real power lies not with the G8, or the G20 - but with the Fed. It's the US central bank that investors will be listening to most closely this week, when it concludes its policy meeting on Wednesday.

How and when the US central bank starts to unwind the incredible support it has been giving to the US and global economy will be the big story in financial markets for months and years to come (for more on this see my earlier blog).

There will surely be many more bumps on this road. But for now, at least, the investors and analysts I hear from don't seem to think the US central bank will let the panic in the US bond market get out of hand - or go too far ahead of the recovery in the real economy. There's a similar air of cautious optimism in the UK - though, as Robert Peston has pointed out, people are understandably less relaxed in other parts of Europe.

The mood in many emerging market economies is not relaxed at all. All the talk there is of a "sudden stop" in capital inflows - and what that would do to their domestic economies. And for good reason, because it is in these countries that a lot of the cheap liquidity pumped out by Western central banks has ended up.

A recent report from Morgan Stanley reminds us how big the numbers are. They point out that the market value of equity in the main emerging market stock markets has risen from $570bn in early 2003 to $3,730bn.

There has also been an explosion in developed country demand for these countries' domestic bonds, with cumulative investments of about $400bn since 2010, according to the same report.

Emerging market currencies have been tumbling since the ructions in global bond markets began. This comes as welcome relief to some, like Israel, who have not enjoyed their currency being so popular with international investors.

But, to others, the change in market mood poses a real threat, especially countries that are still heavily dependent on foreign borrowing, in currencies that they do not control (usually dollars).

The Indian central bank declined to cut interest rates today - partly thanks to fears that the falling value of the rupee would lead to domestic inflation getting out of hand. Many other emerging market central banks could face the same dilemma in the coming months, caught between easing policy to support the domestic economy, and raising interest rates to limit inflation and defend the currency.

Who is most exposed to what economists call a "sudden shock" - a big rush out of emerging markets, as the flood of cheap liquidity in US and European markets begins to dry up?

Every analyst has their own list, but if you look at who is most dependent on borrowing from global investors, in foreign currency, and who has seen the biggest run up in domestic markets, Morgan Stanley says Brazil, Mexico, South Africa, Turkey, and Ukraine look most exposed, with Argentina, Hungary, Indonesia and Poland considered "borderline". Safest, in their view, are China, Israel, Russia and Peru.

We've got so used to financial crises happening in rich developed markets, you might say a good old fashioned emerging market crisis is long overdue. But to many it will seem a rough kind of justice, if the people most affected by the end of loose money policies in the US and Europe are in countries that those policies were never really designed to help.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 98.

    You just have to take into public ownership and control the WHOLE finance industry
    Inter alia, the redistribution of capital it entails together with the proper rates of tax, will release huge quantities of posh labour to work to pay back China & India
    Finance was the only industry not under democratic control 1945-51
    Private finance accumulations always were & always will be our GREATEST problem

  • rate this

    Comment number 97.

    It's all about cash flow.

    Cheap seats can wear the Harlequins number two shirt.

  • rate this

    Comment number 96.

    Pensions ~ the hiccup our short sighted champagne quaffing financial geniuses kicked down the road, over and over, was is longevity.

    The financial world being the quite practical ruthless beast that it is, there will be a solution to longevity rather than the stupidity of annuities.

    Right, Ascot's on, and ladies are to wear a bowler this year. No googlies and the umpire is chaperone... ;) slap

  • rate this

    Comment number 95.

    It was never going to work out with annuities for all, annuities as a panacea. The pot simply grows and grows and.... grows.

    It didn't take genius to work that out. Your pension, how ever arranged comes out of this months money supply. It's a good business that benefits the economy until.... now. That monthly payment to the retired is a brilliant idea fraught with impossibility

  • rate this

    Comment number 94.

    88. A "We are far too comfortable still....."

    Pensions are I think the mechanism for collapse. When it becomes clear that 'saving' ffor a pension is a pointless and worthless activity personal prudence will be so affronted by annuity rates falling to below 2% thus delivering a quarter of the 'expected return' and when a significant number of retirees see this than the brown stuff hits the fan!

  • rate this

    Comment number 93.

    What is termed bubble of bonds, isn't really. It is a calculated bet to preserve capital. As the naughty yield seekers do again what they did before, bonds can go negative yield. It's very much easier to... insure your employment by playing safe and protecting the pot, than it is to take risks and jerk around using futures to hedge that risk.

    All US needs is to significantly improve tax take

  • rate this

    Comment number 92.

    You know that place where the nuts come from?

    Well, it started off a simple protest in Sao Paulo as a demonstration by students against an increase in bus fares from R$3 to R$3.20, and then quickly morphed into general demonstration of discontent with the nation’s political classes on both sides of the spectrum involving over 200,000 across the country,

    Cucumber sandwish, anyone?

  • rate this

    Comment number 91.

    finance creates wealth by riding rough shod over every other individual or business operation. They lie , cheat, make exaggerated claims on returns, right one sided contracts that protect their interests and not the consumer. The real economy is designing products and making things, either goods or services. When a currency trader moves the rate he can mess up a manufacturing business profit/loss

  • rate this

    Comment number 90.

    There is only so long an economy can run on empty, eating itself.

    Well guess what. The Mediterranean countries have been doing it for some time. We have been doing it too. But we have fooled ourselves - and others - that we haven't been.

    We have all been fooling ourselves that Finance creates wealth.
    It may well give that impression. For a while. How long?

    Ask those that think money is wealth..

  • rate this

    Comment number 89.

    85 billion per/month , USA is digging itself into a much bigger debt hole.
    They need to face up to the facts consumer consumption is dead, outsourcing jobs and bringing in foreign workers on much lower hourly rates has killed their economy stone dead.
    Every western economy that went this route is in trouble, low wages means low demand of goods & services so you end up in a downward spiral.

  • rate this

    Comment number 88.

    We are consenting - no one has come up with a better plan that we the people support. The politicians are in corporate hands. Revolution a la Syria is beyond our imagination. We are far too comfortable still.....

  • rate this

    Comment number 87.

    If the USA turns around its fiscal deficit (ala crah bang wallop) and regardless of how it is spent or how loud its thieving upper crust squeal, the boom is just around the corner. Fail to realise the truth of your predicament and there will be an express train arriving around that corner. It's not about profit, those focused on it are out of cycle.

  • rate this

    Comment number 86.

    More facts than speculation on taper.

    #81 JFH I do understand, and I agree with you.
    It is politics and main line economists that will not allow it to happen.
    and the bond bubble just gets bigger.
    will it be Japan or more bank failures eg Deutche bank before the whole lot crashes?

  • rate this

    Comment number 85.


    in the end government has to be by CONSENT- even in the UK.

    see 83.

    84 purple


    The Euro is almost the only existing economic structural element that will survive. The banks will not! And possibly the Nation state's of Europe will not, but the Euro will.


    to get a recovery in international competitiveness we NEED a property crash! Then we can create real jobs!

  • rate this

    Comment number 84.

    Concepts underly EU fiscal crash bang wallop. Those measuring and assessing the stats are happy when member states are in trade surplus. Achieving that is shrinking demand on a global scale and, whether economies were inflated before, they are not now but are BROKE and destituted awaiting the rush of air out of finance. Property crash ahead and no way around it. Bye, bye, the Euro.

  • rate this

    Comment number 83.


    The length of the depression is even being hinted at by the government - see describing, just last week, not just the next election being an austerity election, but the 2020 one too.

    And the next in 2025 and the next in 2030 probably too - but the idiots wont tell you that!

    The key is to break the bankocracy!

    Politicians need to understand that the people will not put up with their idiocy!

  • rate this

    Comment number 82.

    80. Permanantwritingonthewall
    The greedy shall inherit the earth - sorry but the consequences of greed are sadly well rewarded. The greedy have the power, the police, the politicians and the tanks. Game set and match to the greedy.

  • rate this

    Comment number 81.


    You seem not to comprehend that UNTIL a deleveraging takes place the global economy will remain in DEPRESSION...

    But history shows that Depressions do end (in the way described in 56 and by I. Fischer)... eventually.

    The Long Depression 1870-1890 was a property bubble depression and it took 25 years or so - there is no reason to suppose that this one will be quicker.

  • Comment number 80.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 79.

    Sorry but l have to bang a drum again

    The EU Fiscal Compact is strangling world trade by crushing demand

    Warning signs about EU DEMAND have been long time. Fix as many membet states government budgets as you like, the loss of demand is now death spiral

    Hot off the press ~

    The economics are flawed.


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