The next sudden stop
Sebnem Kalemli-Ozcan 07 January 2014
Financial crises are generally preceded by credit booms and a build-up of external debts. Although it is unclear whether Turkey is experiencing a financial bubble, as of 2013, 58% of the corporate sector’s debt was denominated in foreign currencies. This column argues that this explains the Central Bank of Turkey’s interventions to prop up the value of the Turkish lira. Given the relatively low level of reserves and the unfolding corruption scandal, it is a critical question how long the Bank can continue to do so.
The ominous facts are well known – the strongest predictors of financial crises are domestic credit booms and external debts (Reinhart and Rogoff 2011). In emerging markets, credit booms are generally preceded by large capital inflows (Reinhart and Reinhart 2010). Many high-growth emerging markets have been receiving capital inflows for the last five years as the developed economies have been attending to their wounds from the Global Financial Crisis. Now the tide is reversing. Emerging markets are experiencing slowdowns in growth and widening current-account deficits.
Financial markets International finance
capital flows, emerging markets, global financial crisis, sudden stops, Turkey, tapering, liability dollarisation