Globalisation is a fickle business. The “interconnectedness” of economies around the world became startlingly clear in the aftermath of the collapse of Lehman Brothers in 2008, as the shock was transmitted and amplified through financial markets.
New research by Goldman Sachs suggests that as the euro zone slowdown bites in the coming months, families and businesses from Istanbul to Lima will be reminded that, like it or not, we’re all in this together.
Emerging economies were hit hard by the Great Recession in 2 008-09, but many managed to recover with the help of drastic cuts in interest rates by the European Central Bank, the Bank of England and the US Fed, which sent cheap credit flowing to firms and businesses far beyond the borders of Europe or the US.
While credit flows in the world’s largest economies have all but ground to a halt since the crunch, in emerging markets they’re back to pre-crisis levels.
Depressed demand for exports from euro zone customers is the most obvious channel through which the turmoil in the euro area will hit other economies.But Goldman’s analysts identify two other ways in which the crisis that has spiralled out from Greece and Portugal to plunge the German economy into the red in the final quarter of 2011 will hit scores of other countries.
First, “deleveraging” — the process of struggling banks withdrawing assets to get their balance sheets back in shape — will squeeze the flow of credit and make it harder for businesses in many emerging countries to raise capital from foreign investors. At the same time, Goldman argues that a collapse in confidence could lead to a sharp decline in bank lending even in countries that aren’t heavily dependent on lending from euro zone institutions.
By testing how closely linked recent economic growth has been to credit expansion — and therefore how vulnerable each country is likely to be to a so-called “sudden stop” in capital flows — Goldman identifies a disturbingly long list of economies that could be in the firing line.
Turkey, Colombia, Hong Kong, Peru, Indonesia, Russia and Poland have all attracted a healthy flow of investment since 2008, as analysts have thumbed the pages of their atlases looking for alternatives to the clapped-out economies in the developed world. As Europe’s leaders gear up for yet another make-or-break summit at the end of the month, there’s much more than just the future of the euro at stake.