Stock mar­ket tur­moil may ex­pose flaws in global fi­nance

Iran Daily - - Tse & Global Economy -

Was last week’s global stock mar­ket sell-off only a ‘cor­rec­tion’ or does it sig­nify a new pe­riod of ¿nan­cial in­sta­bil­ity, caused by ma­jor Àaws in the world ¿nan­cial sys­tem?

The stock mar­ket tur­moil has sparked con­cerns that the rel­a­tively good eco­nomic times in the past cou­ple of years, at least in the de­vel­oped coun­tries, could be end­ing, IPS re­ported.

It is too early yet to un­der­stand what has just taken place or pre­dict what comes next. It is widely agreed that a ‘cor­rec­tion’ has taken place in the US stock mar­ket. But whether this is just a blip, or will progress to a crash, re­mains to be seen.

Some an­a­lysts said there is noth­ing to worry about as such cor­rec­tions to over­val­ued mar­kets are nor­mal and soon there will be busi­ness as usual. Oth­ers are more pes­simistic, with a few even pre­dict­ing it is the start of the worst bear mar­ket ever.

The im­me­di­ate trig­ger was the pos­i­tive news on US jobs, prompt­ing fears of wage in­creases and higher in­àa­tion that would pres­sur­ize the Fed­eral Re­serve to raise in­ter­est rates more rapidly. Higher in­ter­est has a neg­a­tive ef­fect on stock mar­kets as they give an in­cen­tive to in­vestors to put their money in al­ter­na­tives, es­pe­cially bonds.

In good times, a lot of short-term spec­u­la­tive funds Àow from the de­vel­oped coun­tries to the de­vel­op­ing coun­tries in search of higher yield. But in times of global un­cer­tainty, or if in­ter­est rates rise in the US thus pro­vid­ing higher re­turns to in­vestors, the funds can rapidly Àow back, of­ten caus­ing signi¿cant dam­age or even dev­as­ta­tion to the host de­vel­op­ing economies.

But the larger rea­son for the sell-off is the jump in eq­uity prices to record lev­els, caused by spec­u­la­tive in­vest­ments not backed by fun­da­men­tals, and fu­eled by the easy money pol­icy that the US gov­ern­ment pur­sued in the hope of stim­u­lat­ing eco­nomic growth. Some of the tril­lions of dol­lars pumped into the bank­ing sys­tem by ‘quan­ti­ta­tive eas­ing’ con­trib­uted to the stock mar­ket bub­ble.

Even though quan­ti­ta­tive eas­ing has ended and is be­ing re­versed, US stock prices con­tin­ued to rise rapidly in Jan­uary. It was a mat­ter of time be­fore a down­turn oc­curred.

The stock mar­ket sell-off, if it con­tin­ues, can have large reper­cus­sions on de­vel­op­ing coun­tries.

There is the do­mes­tic ef­fect. Af­fected in­vestors feel­ing they have less wealth will de­crease their spend­ing, af­fect­ing de­mand for goods and re­duc­ing GDP growth. Those that bor­rowed to spec­u­late in the stock mar­ket may have debt-re­pay­ment prob­lems.

Com­pa­nies may see their mar­ket cap­i­tal­iza­tion and as­set val­ues re­duced as the prices of their shares go down. If the sell-off be­comes more pro­longed, banks start wor­ry­ing about non-per­form­ing loans.

Then there is a com­plex of is­sues re­lated to the in­ter­ac­tion be­tween de­vel­op­ing economies with the global ¿nan­cial mar­kets. The stock-mar­ket tur­bu­lence could af­fect global in­vestor con¿dence in emerg­ing economies, which are seen as riskier than the US.

In good times, a lot of short-term spec­u­la­tive funds Àow from the de­vel­oped coun­tries to the de­vel­op­ing coun­tries in search of higher yield. But in times of global un­cer­tainty, or if in­ter­est rates rise in the US thus pro­vid­ing higher re­turns to in­vestors, the funds can rapidly Àow back, of­ten caus­ing signi¿cant dam­age or even dev­as­ta­tion to the host de­vel­op­ing economies.

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