Ever since August 2018, when Turkey fell into a currency crisis, the word “contagion” has spread rapidly across social media at the first sign of some serious disruption in an emerging market, but each time the direst of scenarios has failed to grip global markets.

So how about this time round, with the latest Turkey shock served up by President Recep Tayyip Erdogan (namely his late-Friday-night March 19 firing of the central bank governor, appointed less than five months ago with what was supposed to be an Erdogan-blessed plan to get Turkey’s monetary policy in line with global norms)? Might it cause a market inferno?

As things stand, with the markets still closed for the weekend [quick Ed’s note newsflash: with trading opening up in Asia, the lira by 21:00 GMT had slumped 13.35% to 8.2987…], and with no reliable insight as to what the Erdogan regime is planning to do in the face of the portfolio outflows expected to undermine Turkey in coming days, it is too early to be making any confident predictions, one way or the other.

However, Robin Brooks of the Institute of International Finance (IIF), known to Turkish Twitter watchers of the lira as “5.50 Robin”, seems assured that we are in an “EM Tantrum” following Erdogan’s latest return to “Erdoganomics”.

Given that the IIF remains among the epicentres when it comes to the currently moribund Washington Consensus neoliberalism first outlined in 1989, its statements on a “2021 EM tantrum” are hard to ignore.

It is perhaps useful to remind ourselves of what is different now to all those other moments since 2018 when there were warnings of contagion.

The answer is actually quite simple if we tear our attention away from the sometimes rather too inward looking notes circulating around the finance industry (on occasions seeming to offer a parallel reality to what is in fact reality) and take a proper look around us. Yes, here on Planet Earth we have been living through a pandemic for more than a year now, a pandemic that continues to reveal that our systems as a whole, from the economy to health, as well as the world leaders that stand over them, are just about totally naked.

Are we in for a defining “shock” after which no-one will be able to question the conclusion that we have moved into “no underpants” territory?

Brooks appears to be suggesting so when it comes to financial flows to EMs.

It was at the beginning of March when the IFF first flagged up rising US Treasury yields. They escalated in the last week of February, causing portfolio outflows from EMs.

 

“Flows have turned negative and that’s really a surprise, as we were still early on in the rebound from a cataclysmic 2020,” Brooks tweeted on March 5.

“The honeymoon that began after positive vaccine headlines in November is unfortunately over. We are in a repeat of the 2013 taper tantrum,” he added.

[Just a quick flashback note here. Turkey has felt the impact of the process that began with the “2013 taper tantrum” down to its bones, but the trigger was widely described as the “Gezi Protests”. Eight years later and Turkey is on the way to becoming the perfect banana republic with glorious collapses due across all fields from the economy to education.]

In the few days after the “EM tantrum” phrase was coined at the beginning of March, its popularity spread across the world of finance.

Let’s now leave the floor to Brooks to hear his account of what’s happened just prior to, and since the Erdogan shock, of March 19.

Brooks on March 19, just prior to the Erdogan shock: “Wonderful to see Turkish Lira strengthen. $/TRY is again below our 7.50 fair value. But better not extrapolate this move too far. Yesterday's CBRT [Turkish central bank] hike needs to be seen against a much more uncertain global backdrop, where rising US rates are a big EM headwind.”

Brooks on March 19: “There's 3 EMs where foreign investors pulled out more cash during COVID than in the 2008 crisis: Turkey, Brazil & Poland.”

“Sudden stop”

Brooks on March 20: “$/TRY was above 8.50 as recently as Nov 6. Unfortunately, risk of another "sudden stop" in capital flows like in 2018 is now elevated. Risk of contagion is also high. Brazil is being talked about in markets as most vulnerable, given that the central bank also hiked this week...”

“This is the 2021 EM tantrum...”

Brooks on March 20: “Foreign real money flows into Turkey held up better than South Africa, one of Turkey's main EM peers. That resilience was entirely due to the policy shift that took place in November & it's likely that outflows will now be large, putting depreciation pressure on Lira.”

Brooks on March 20: “There's lots that's idiosyncratic about Turkey, but recent developments bear on the rest of EM. EM central banks are forced to hike by rapidly rising long-term US yields. That's politically difficult & it's easier to just let the exchange rate go. This is the 2021 EM tantrum...”

Brooks on March 20: “US fiscal stimulus & resulting sharp rise in long-term yields are a threat to EM. Turkey's central bank this week tried to get ahead of this, but that's hard given weak growth & lots of slack. So the news out of Turkey is about something much bigger: US stimulus is unbalancing EM.”

“Much bigger than in 2013”

Brooks on March 21: “This rise in US longer-term yields is starting to look like it will be much bigger than in 2013, which makes it potentially much more dangerous to emerging markets...”