IMF Ready to Help Emerging Markets

At the World Economic Forum in Dalian in China the Deputy Managing Director of the International Monetary Fund Zhu Min stated: “If a country has payment problems, which will cause not only financial instability but systemic instability as well, and if a country is willing to request service from the Fund, those are the basic issues. Our job is to maintain global financial stability, particularly on payment issues”. Christine Lagarde the Managing Director of the IMF also stated just last month that the organization would be ready to provide assistance to emerging economies by the implementation of procedures and the pledge of advice and economic instruments to get the emerging economies moving again.

IMF

But, it is all very well and good providing the necessary advice and the needed instruments to give aid to those countries; but what will be the conditions that go along with it? The IMF is notoriously good at providing money and deepening the debt crisis of countries that are in need of cash. Zhu Min stated that countries that would be helped in the future would need to provide growing proof of communication as well as transparency of public spending in order to meet the demands of a globalized economy. However, even developed countries don’t have transparency and they are far from good communicators with regard to public spending. So, how can it be expected of emerging markets to provide the level of transparency that the IMF is talking about?

Emerging Markets and their Economies

Emerging Markets and their Economies

USA and the Fed

Indeed, the Federal Reserve must take into consideration that with tapering of the Quantitative Easing methods in place, there will most certainly be a ripple effect into the emerging markets of the world. Those markets will in turn have an effect on the US once again. What goes around comes around. If the Federal Reserve carries out its tapering policy, then it must be ready for the effect that it will have on itself and the US economy via emerging countries’ economies. To all intents and purposes, the Federal Reserve can only be hurting itself in the long run.

Lagarde stated on September 8th: “Very negative spill-over effects on the emerging market economies could very much backfire on other economies. So to assume that [the] domestic economy is totally isolated, that a country is an island, would not be the right approach”. She went on to add that she couldn’t believe that the central banks in developed economies would not be able to see that this was the case and to take decisions based upon that. However, the Federal Reserve has never spoken of anything except the unemployment rate in the US and the need to bring that to a level that would enable growth in the economy. The Federal Reserve and Ben Bernanke have never mentioned anything outside of the US and certainly believe that either the economy is isolated in the USA or that it is sufficiently robust to be able to go it alone.

The lack of ultra-loose monetary policies of the central banks of the West has certainly had an effect on the economies of the world, but only temporarily giving it a crutch to lean on. Removing that alone will not make the economies of the emerging world collapse; not that alone. But, in the present economic situation of capital outflows from those economies and the lack of finances to implement structural reforms with a lack of adequate levels of international trade mean that those emerging economies may well have the last drop of water that just makes the cup overflow and the ensuing flood of economic problems will cause a backdraft on the West. The casualties may not be those that we presume.

If Larry Summers is appointed the next Fed chairmen when Ben Bernanke goes, then it is likely that the unwinding of QE will be sooner than expected. US monetary policies have provided capital for the emerging markets in the past few years via QE. Since May 2013, talk of tapering has sent those markets into disarray. Research carried out by Bank of America Merrill Lynch has proved that what takes place in the US has an effect in other markets and in particular when the chairman of the Federal Reserve changes. This is nearly always followed by an increase in interest rates, encouraging money to leave the emerging markets and return back to the USA.

But, we have absolutely nothing to worry about at all; the International Monetary Fund will come along with some fabulous advice pinpointing the exact way to make everything fall into place and the sun will come out shining once again.

And they all lived happily ever after. I hope Lagarde knows that fairytales are for children.

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tothetick

Professional team of writers/analysts analyzing the financial markets.

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