Every dealer was expecting a correction as Stock markets hiked at such a rapid pace. No one expected Argentina leading to a full-fledged stampede. Yet, its position seemed untenable faced with double-digit inflation and a plummeting currency. Efforts to enforce exchange controls backfired fueling a rush to get rid of domestic money. As authorities threw in the towel, allowing free access to US dollars for saving purposes, the peso collapsed rising widespread fear of a domino effect on other Latin American economies.
Buenos Aires acted in the right way by bridging the gap between its currency real value and the fake official quote. Yet, in doing so, it has openly exposed the emerging countries’ vulnerability. For the last years, their expansion delivery showed an outstanding record harnessed by cheap money conditions and renewed risk appetite, once the financial crisis looked firmly under control. However, their export-led growth strategy lent too much on keeping artificially low currencies leading to massive inefficiency and mismatches.
Contagion on Brazil and Mexico sends shivers down the spine to investors. The prospect that Asian giants might falter adds to the nervous mood. Yet, adjustment in the world economy seems far from over. As the US is bound to gradually unwind its zero-rate aggressive monetary policy, further tensions will build up. Hot money fleeing from emerging countries will fuel instability badly crippling vulnerable economies. Furthermore, the chances Europe might accomplish a swift recovery could be seriously jeopardized.
The Argentina crisis has also unveiled the high risk the main Spanish banks incur by overloading their balance sheets with Latin American assets. Santander and BBVA shares have suffered an unmitigated battering and the worst might still lay ahead. The markets have not waited for the EBA/ECB stress test to deliver their indictment.