Peter Hartcher August 27, 2013
Sydney Morning Herald political and international editor
Illustration: John Shakespeare
At his campaign launch, Tony Abbott promised the world a ''no surprises'' government. Unfortunately, the world can't make the same promise to Tony Abbott.
While we've been immersed in a domestic election campaign, one event has emerged to threaten an incoming government with a pretty nasty surprise.
A major new wave of global financial turmoil has struck. It's hit the so-called emerging markets hardest. ''Emerging markets'' is the fashionable term for the most successful among what used to be called ''developing countries''.
Last week, India and Indonesia were the most obvious victims as their markets crunched and their governments hastily announced stabilisation packages.
But it's also damaged the markets of Brazil, Turkey and South Africa, and many smaller countries. ''There has been a great sucking of funds from emerging markets,'' as The Economist put it.
The value of listed shares in the emerging countries has fallen by $US1 trillion ($1.1 trillion) overall since May, according to Bloomberg. That's wealth investors thought they owned, but has now vanished.
In trying to manage the turmoil, their central banks have lost $US81 billion in reserves, calculates Morgan Stanley.
A Harvard expert on financial crises, Carmen Reinhart, says that ''it could get very ugly'' in these countries because they face rising risks of full-blown currency crises and banking crises.
One problem here is that these are the very countries that have been booming recently and are supposed to be supplying much of the world's economic growth for the years ahead.
Have you heard the trendy acronym for the big emerging countries that were supposed to buoy the globe - the BRICs? It stands for Brazil, Russia, India and China and it has been a byword for investor optimism and global growth for the past few years. It's been the theme of a thousand conferences.
It made famous the man who dreamt it up, a former Goldman Sachs executive named Jim O'Neill. Today, he says he's disappointed with all the BRICs, with an exception: ''If I were to change it, I would just leave the 'C.' But then, I don't think it would be much of an acronym,'' he told Dow Jones.
It's true that China remains reasonably robust. And with its capital controls and its vast foreign exchange reserves of $US3.5 trillion, it's largely impregnable to a crisis of capital flight.
But even mighty China is not immune to world events. ''If the current upheaval in key emerging markets were to threaten [the] global recovery, we would need to revise down our growth outlook for China,'' says an economist at the RBS, Louis Kuijs.
And the woman who runs the International Monetary Fund, Christine Lagarde, said at the weekend the evolving crisis could indeed harm the entire globe:
''Even with the best of efforts,'' she told a major gathering of global economic officials in the US, ''the dam might leak. So we need further lines of defence.''
Surely one of the clearest lessons of recent years is that no country is immune from financial crisis in another.
What's caused this sudden turmoil? Lagarde's dam metaphor is useful because it's all about liquidity. ''The emerging markets have been driven up in recent years by a huge tidal wave of liquidity flowing in,'' says the prominent international economist Ken Courtis.
''Now it's starting to move the other way, and you can't do that without breaking a lot of China.''
That money tsunami has come mainly from the printing presses of the US, but also from those of the EU and Japan. Together, their central banks have issued a staggering $US7 trillion of new money since the global crisis of 2008. They pumped this cash out as an emergency measure to try to aid recovery in their depressed economies.
It goes by the fancy name of quantitative easing, but it's just plain old money printing, creating dollars, euros and yen out of thin air, unconstrained, in unprecedented quantities. Investors put much of this new money, available at zero interest rates, into the emerging markets in hope of big returns.
Such monetary recklessness always has unintended consequences. One is the emerging crisis in the emerging countries. The Wall Street Journal on the weekend called it an example of ''the topsy-turvy world the Federal Reserve has created''.
One of the troubling aspects of this story so far is that the Fed and the other central banks have not even started to slow their frenetic money-printing. The movement so far is mere anticipation.
''I think everyone - Australia and everyone else - should understand that the crisis that started in 2008 with the bursting of George Bush's bubble is still continuing,'' says Courtis.
''The only prudent course is to be cautious, responsible, alert and prepared to respond quickly. Complacency in this environment is a recipe for creating lots of trouble for yourself.''
In Australia, Labor is guilty of complacency. Boasting of Australia's AAA credit rating, it has continuously been putting its planned return to surplus on the never-never. When it first made the promise, net federal debt was set to peak at 7 per cent of GDP. Now it's expected to peak at 13.
And the Coalition has made great play out of exaggerating Labor's debt and deficits, but is looking suspiciously like it will give us similar complacency. It made a hash of its budget plans at the 2010 election and has yet to show us its plans for this election.
All this is bad enough. But both parties have been carefully preserving a studied ignorance of the warning by the former Treasury Secretary Ken Henry that the national revenue base is permanently impaired and an incoming government will be stuck in a ''permanent process'' of cutting spending.
Put an international crisis on top of this and you can see the potential for some very unpleasant surprises.
Peter Hartcher is the international editor.
