Stephen Roach is Worried About an Emerging Markets Contagion

By on September 10, 2013

Stephen Roach - Yale UniversityStephen Roach, Senior Fellow at Yale University, was interviewed on CNBC this week and expressed his concern regarding a potential for contagion in the emerging markets that could lead to a global financial crisis. This could rival the influence of Europe’s sovereign debt issue, according to Roach.

Countries with current account deficits include India, Indonesia, Brazil, Turkey and South Africa. Roach said the ending of QE is creating an arbitrage back to the developed world.

Roach said the Fed’s QE2, QE3, and Operation Twist programs have done nothing but inject excess liquidity into financial assets.

All blame can’t be placed on the Fed as the developing economies of India and Indonesia, in particular, should have been hard at work dealing with their structural problems, Roach said.

When asked if these developments were already priced into emerging markets, Roach replied he didn’t know. Given that the Fed has shown some skittishness and backed off some of their tapering talk there could be a rally, Roach said.

Roach stated the Fed’s unsustainable policies were put in place as an emergency measure, but they are continuing which is a mistake that should be corrected as soon as possible.

The interview continued with Roach commenting on the similarities to the late 90’s whereby large current account deficits led to a cross boarder contagion and the downfall of Long Term Capital Management, on whether the new Fed chairman will be more open and frank about the unintended consequences of quantitative easing, and what he would do if he were appointed Fed chairman.

Back in June 2012, Roach explained the European ponzi scheme [link].

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