LDC Currency Free-Fall: Party Like It's 1997?

I was dreaming when I wrote this; forgive me if it goes astray. But when I woke up this morning and watched the Bloomberg channel, I could have sworn it was judgment day. Having lived through the 1997 Asian financial crisis while working as a banker (of all things), I have a heightened sensitivity to currencies going berserk. Friends, I feel for the Indian artist above wanting to save the falling rupee. Aside from highly touted BRICs coming under pressure alike Brazil and India, anticipated normalization of interest rates in the United States is unleashing complications around the world. Indeed, there is a fear that we may be on the cusp of another rehash of 1997 given the prevailing uncertainty over the direction of American policy.

Or, are things really that bad?

Plunging emerging market currencies on the prospect of US stimulus tapering have stirred memories of the 1997 Asian financial crisis, but analysts doubt a similar catastrophe is in the making. "There are negative linkages (now) but I don't think that we are in a repetition of the 1990s crisis," said Jean Medecin, a member of the investment committee at the Carmignac Gestion asset manager.

While the Indian rupee has so far taken the worst beating, falling nearly 15 percent against the US dollar over the past three months, Indonesia's rupiah and the Brazilian real are down 10 percent, and the Turkish lira over 5 percent in a trend that is frightfully reminiscent of the crisis that began in Thailand in mid-1997.

Things have changed in some ways. Most especially, LDCs have far accumulated healthier foreign exchange reserves in anticipation of days like these:

Back then, investors reacted by panicking, withdrawing funds en masse, resulting in the Thai bath eventually collapsing. The phenomenon then spread like a wildfire throughout Asia, and even to Russia, with foreign capital vanishing almost with the blink of an eye.

Short of capital, emerging countries suffered acute shortages of credit, plunging them even deeper into the crisis. Fifteen years on, India's Prime Minister Manmohan Singh last week said emerging countries are now much better equipped. In 1991, India had only 15 days worth of foreign exchange reserves, he said. "Now we have reserves of six to seven months. So there is no comparison. And no question of going back to the 1991 crisis," he said.

Moreover, does intervention really work? The historical record is patchy, but that doesn't seem to stop LDCs from trying anyway:

Simon Derrick, chief currency strategist at BNY Mellon said that "letting the currency take the strain might be the smartest move for some emerging market nations". He noted that in 2008, when emerging markets last tried to stop the outflow of funds, they failed despite spending up to 20 percent of their foreign currency reserves [...]

Still, several countries have moved to defend their currencies. Brazil, which had led emerging market complaints that Western stimulus measures had resulted in the appreciation of their currencies and eroded its competitiveness, turned around, saying it would make $55 billion available to prop up the real. Turkey pledged to inject a minimum of $100 million per day, while India announced it would put $1.26 billion into the banking system by buying back long-term government bonds, although it said the move was aimed at making more credit available to boost economic growth rather than defending the rupee.

The bottom line is that LDCs are better prepared this around to weather currency shocks. Still, there may be some validity to assertions that blaming economic woes on American economic machinations hide a number of structural faults at home alike gaping current account deficits. (Not that the US is free of those, mind you.)