Carney warns of emerging market ‘fire sale’

A “POTENTIALLY major new vulnerability” now faces the world economy, which could trigger a “fire sale” across emerging markets, Mark Carney, the Governor of the Bank of England, warned yesterday.

Mr Carney, who also chairs the Basel-based Financial Stability Board watchdog, told an audience in New York that the growth of asset management investments in emerging markets – from $50 trillion (£38 trillion) to $80 trillion over the past decade – could increase the risk of capital flight from them. He highlighted that more than $30 trillion of assets were invested in illiquid assets – that could prove hard for the funds to sell quickly – while the funds’ investors could in effect demand to cash in their holdings when they want.

Urgent steps were required by authorities in order to avoid these institutions triggering “fire sales” and “contagion” effects across emerging markets, witnessed in Asian and Latin American economies in the Nineties.

The Governor held this up as an example of “the lie that markets always clear”, one of the “three lies of finance that helped cause the global financial crisis”. “Markets only clear in textbooks,” he added. “In reality, people are irrational, economies are imperfect and nature itself is unknowable.”