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It’s 1998 all over again, all over again

Summary:
It’s 1998 again in emerging markets, and it’s good: The best parallel with recent events – major shock (this time, the UK vote), DM central bank liquidity reassurance and market surge – is, in our view, the collapse of Long-Term Capital Management (L...

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It’s 1998 again in emerging markets, and it’s good:

The best parallel with recent events – major shock (this time, the UK vote), DM central bank liquidity reassurance and market surge – is, in our view, the collapse of Long-Term Capital Management (LTCM) in September 1998. In addition to a bailout for LTCM, the Fed ‘turned on a dime’ then and cut rates by 75bp in two months; risk markets took off. While MSCI GEMs fell much more before Sept. 1998 (Asia and Russian crises) than recently, EM rose by 31% in two months after LTCM and by 120% by March 2000. As usual, the USD played a role; after a four-year 34% rally to August 1998, the $ TWI fell by 11% after LTCM. The extremes will be hard to repeat, but the earlier episode confirms how liquidity is a ‘great healer’…

UBS analysts on Tuesday, on the 26 per cent rally in the MSCI index of emerging-market stocks since January. There is the small matter of the Fed not actually cutting rates so far this year — and that in 1998 far more markets were pegged to a dollar that had been rising for much longer.

Alternatively, it’s 1998 again in emerging markets, and it’s bad:

Our parsimonious early warning indicators – gap measures of the credit-to-GDP ratio, debt service ratio, real effective exchange rate, and real property and equity prices – have reliably signalled at least two-thirds of the past 50 financial crises in 30 countries since the early 1990s. We apply two approaches – the signals method and a probit model – to show that the Rubicon may have been crossed in Asia. The early warning indicators are signalling that Asia is now the region in the world most at risk, that a financial crisis could strike Asia at any time, and that the signals are at their highest point since the 1997 Asian crisis…

Nomura analysts on Tuesday, arguing that despite the lack of dollar pegs making this not look like the 1990s crisis again, the “oversized financial cycle” in Asia is showing more signs of coming to an end — potentially abruptly, due to the slowness of China’s credit clean-up.

1990s vs 2010s heatmaps below, on early-warning ‘gaps’ in measures like credit to GDP, real effective exchange rates, and debt servicing ratios relative to their long-term trend. Click to enlarge:

It’s 1998 all over again, all over again

It’s 1998 all over again, all over again

Related link:
The Fed may be about to atone for the “mistake” of 1998 – FT Alphaville

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Joseph Cotterill
Joseph is the FT’s Southern Africa correspondent based in Johannesburg, after previous stints as private equity correspondent and on the Lex column. But he still writes for Alphaville, which he joined way back in March 2010 — right in the middle of the Greek bailout crisis. He has been very interested in all things credit and sovereign debt ever since…

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