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pa3808c.jpg Paul Lachine

The Taper Wolf at the Door

Last spring, the mere possibility that the Fed might reduce its purchases of long-term assets – the so-called “taper” – sent market interest rates in the US soaring and currencies in several emerging countries plummeting. Following an unexpected reprieve, investors are again asking what will happen when the Fed follows through.

SANTIAGO – Last spring, US Federal Reserve Board Chairman Ben Bernanke made a small announcement that had big consequences. The mere possibility that the Fed might reduce its purchases of long-term assets – the so-called “taper” – sent market interest rates in the United States soaring and currencies in countries like Brazil, Turkey, and India plummeting.

Unexpected backtracking by the Fed in September gave markets a reprieve. But now investors are again asking what will happen in emerging markets if and when the big bad taper wolf shows up.

As always with economists, there are two schools of thought. Optimists claim that most emerging economies are well prepared to withstand the shock, because their dollar debts are lower than in the past, while their fiscal positions are much stronger. Pessimists claim that in the absence of well developed local financial markets and a global lender of last resort, emerging economies remain vulnerable to a sudden stop in capital flows.

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