How Dangerous Is the Corporate Debt Bubble?

Former investment banker and author William D. Cohan and Jyoti Thottam, opinion editor for business and economics at The New York Times, talk about the looming corporate debt bubble.

debt bubble

Investors often focus on stock prices to take the temperature of an economy’s health. If share prices are high and rising, they feel upbeat. If price levels sink low, so does investor confidence.

Still, as the 10th anniversary of the Great Recession of 2008 draws nearer, some experts are beginning to worry that a looming bubble in corporate debt poses a danger. “The … domestic debt market – at $41 trillion for the bond market alone – reveals more about our nation’s financial health,” wrote William D. Cohan, a former investment banker, in an op ed in The New York Times earlier this month.

Cohan, author of the recent book, Why Wall Street Matters, believes that the bond market is broadcasting a dangerous message. How serious is this risk? Could the puncturing of the corporate debt bubble spark another recession? What are the dangers of mispriced risk? Cohan joined Jyoti Thottam, opinion editor for business and economics at The New York Times, to speak about these questions and more on the Knowledge@Wharton show on Sirius XM channel 132. (Listen to the complete podcast at the top of this page.)

An edited transcript of the conversation follows.

Knowledge@Wharton: Why do you think it is important to talk about the corporate debt bubble, when everything we see reported about the markets and the economy is portrayed in positive terms?

William Cohan: When everything looks great, we tend to overlook all sorts of crumbs along the trails to trouble, thinking that everything will continue to be great. The stock market is great.

The bond market is great. The economy is booming. The unemployment rate is low. Our President tweets about how great everything is. But if you look underneath the surface, you will see trouble brewing, especially in the bond market. There are a lot of hidden risks.

A lot of the past financial crises and recessions have started in the credit markets because they freeze up. Credit is the lifeblood of our economy and if companies can’t get it, if municipalities can’t get it, if individuals can’t get credit, then they can’t power the economy. People in the bond market think it is safe because there is an obligation on the other side to repay their money. That obligation is there. But people forget that it can be very risky as well. That is why I felt the need to remind them that it can be risky and to show them the crumbs that I am seeing on the pathway.

Knowledge@Wharton: Jyoti, why did you think this was such an important topic?

Jyoti Thottam: One of the things that we wanted to do was to be mindful of what happened in the last financial crisis. There was a sense that there were many warning signs, red flags waving, that people somehow missed. We are on the lookout for those kinds of signs.

Knowledge@Wharton: Given the cycle of issues that we see in the financial sector, could we be facing another significant economic downturn, maybe not today or next month, but in the next 12 or 18 months?

Cohan: Financial crises are part of the human condition. It doesn’t take Wall Street to bring about financial crises; it is part of human nature. I think that America was founded in the midst of a financial crisis, because the federal government couldn’t pay back the debt that it took on to have the Revolutionary War.

As I walk through in Why Wall Street Matters, there’s been a financial crisis pretty much every 20 years in this country since it started. Some are more severe than others, and sometimes there are long periods where there is no financial crisis, especially after regulations tightened considerably after the Great Depression. It was quiescent in the financial markets until the mid-80s. But as a result of investment banks and banks going public and substituting other people’s money for partners’ capital, bankers and traders have been rewarded to take big risks with other people’s money. This has exacerbated financial crises in the last 40 years. They have been getting deeper and more severe.

Thottam: Ben Bernanke [former chairman of the Federal Reserve] was a student of depressions and recessions and what to do after that. He, and everyone else around him, came up with this somewhat novel policy, quantitative easing (QE), which in retrospect perhaps was the right thing to do. One of the things that I felt Bill did really well in his piece was to lay out that we had QE, at some point it had to be unwound, and after so many years of super low interest rates, what is the effect of that? We don’t know. We are going to see that right now.

Cohan: There are a lot of experts who worry about this. Jamie Dimon, the CEO of JP Morgan Chase, is worried about it. James Grant, who is the guru of the bond market at Grant’s Interest Rates Observer, writes about this repeatedly. Jeffrey Gundlach, who runs one of the biggest bond funds on the planet, has worried about this continuously and talked about it.

Knowledge@Wharton: How big a role would the corporate debt bubble play if we were to get into a recession in the next several years?

Cohan: It is hard to know. One never knows what the catalyst is going to be for the next financial crisis. We know that there have been catalysts in the past. But the truth is nobody rings a bell at the top of the market and says, “That’s it. It’s over. It’s been fun, guys. It’s all downhill from here.”

When I was a banker 27 years ago, the management of United Airlines (UAL) was trying to take it private in what was then one of the largest management buyouts of all time. They had got the commitment letter from Citibank to finance that deal. But suddenly Citibank went back to the management and said, we can’t finance this deal, the market is not there for this buyout. This was in 1991, four years after the stock market crash of 1987. It became a huge problem and shut down the credit markets for the next two or three years. The fact that the UAL buyout could not be financed in the market was the signal that the party was over, and that we were now heading into a severe credit crunch.

Anything could be a catalyst. Maybe Tesla trying to go private will be a catalyst for this market shutting down. And that is when real trouble happens. Because people who had nothing to do with it, with the excess, can’t get access to capital.
Knowledge@Wharton: Why do you think the markets have an issue with mis-pricing risk at this point?

Cohan: This goes back to the experiment that Ben Bernanke, the Fed chairman, put in place after the financial crisis in 2008 for the next eight years — the quantitative easing program — which expanded the Fed’s balance sheet from around $900 billion to $4.5 trillion dollars. It was then buying up all kinds of debt securities, from safe treasuries to mortgage-backed securities that were on the balance sheets of these banks. As a result of the combination of wanting to keep short-term interest rates low, and then buying up all of these bonds in the market which forced their prices up, the yields were forced down because bond prices trade in inverse proportion to their yield. The yields of bonds were near zero. Investors, of course, don’t want low yields. They want to find debt instruments that pay them higher and higher yields. So they would bid up the price of other high yielding securities, drive down their yield, and the cycle just continued. You have this continuous eight-year period of mis-pricing risk. That is where I think we are now.

Thottam: It is still unclear if this is going to be bad just for individual companies. Once the pendulum swings the other way, will it be just a handful of individual companies that go bust without affecting the rest of the market? [It is the] same thing with individual countries that may have taken on too much dollar-denominated debt. Is it just those countries, or are they connected? It is very difficult to know at this stage.

Knowledge@Wharton: Quantitative easing helped the banks. But for a lot of smaller businesses, why didn’t it give them a bigger boost to be able to get loans, or for home buyers to get mortgages?

Cohan: Well, because the pendulum swings on the credit underwriting front. Banks go from seeming to have virtually no standards — if you breathe you can get a mortgage, if you breathe you can get a line of credit — to disaster striking, as happened in 2008. And then the credit pendulum swings back the other way. Only the most credit worthy companies, the single A, the double A, the triple A companies can get access to capital, or the private equity funds, or the hedge funds. They can get all of the capital they need. But individual home owners or people who want to buy a home, can’t get [loans]. Small and medium sized businesses which drive so much job creation in this country were basically choked off from the credit markets after the financial crisis. They may still not able to get the capital they need. Home owners may still not be able to get the mortgages to buy homes unless they put down some large percentage in equity.

So you’ve got lots of things going on underneath the surface at the same time. I think the biggest risk is the desire by investors around the world for higher and higher yields. This has forced them to mis-price the bonds that they are buying, the debt that they are buying, the loans that they are buying. They are not getting adequately compensated for the risks that they are taking. And they are willing to forgo all sorts of covenants and other protections.
Knowledge@Wharton: Jyoti, you use the example in the piece that you did on Asurion [technology solutions company], and those covenant light loans, as you called them.

Thottam: That’s right. That was one of the things that really resonated with me. People remember what the mortgage market was like in 2006, 2007 and the loosening of credit standards in the mortgage market in 2008. You see a similar thing now in the corporate debt market.

Cohan: It is not just one isolated industry or a group of companies. This is happening throughout the corporate loan and bond market. A lot of these loans are made by the big banks, but then they are repackaged into securities, and that potential trouble is exported as investments all around the world. That is what happened with mortgage-backed securities in 2005, 2006 and 2007 leading up to the crisis. Something similar, I fear, is happening now. You can’t mis-price risk for eight years and expect no consequences.

Knowledge@Wharton: What about what we are seeing in Turkey right now?

Thottam: You can see it’s that chasing of yield that has been going on in the last few years. Investors are looking for higher yields, not just in the United States, but all around the world. Even if you didn’t have the political conflict between Turkey and the U.S., the underlying problems, the economic problems, were there.

Cohan: Bernanke’s idea of quantitative easing worked well to get our banks back to being healthy and our economy rolling again. And so, central bankers around the world copied what Bernanke did. It is not just mis-pricing of risk that has happened in this country, it has happened with debt securities all around the world.

Knowledge@Wharton: How similar are some of these elements that we are seeing now to what we saw pre-2008?

Thottam: Some of them are similar. For example, the manner in which big pension funds are invested in some of these securities is similar to how they were exposed to mortgage-backed securities in 2008.

Cohan: The biggest investors in the bond markets are mutual funds and pension funds — firefighter pensions, police pensions, teacher pensions, ordinary Americans who probably don’t understand the risks of buying into these risky bonds. One example is the bonds of Toys R Us, which was the biggest toy retailer that KKR [investment firm Kohlberg Kravis Roberts] had taken private. They were trading at near par, nearly 100 cents on the dollar until KKR announced last year that the company was going to go bankrupt. The bonds have lost 95% of their value. That is money that is not coming back. It can’t be recovered.

Knowledge@Wharton: What do you think needs to be done at this point with some of these scenarios?

Thottam: As Bill points out, at the end of the day the people who are putting these deals together are getting paid. So until you change people’s incentives, things are not going to change. In some cases, companies are taking on debt, not to build a new factory or invest in new technology, but to pay fees to their private equity owners. That is not a very productive use of capital. That is something that we have to take a hard look at.

Cohan: Changing what you reward people on Wall Street to do requires great courage, which doesn’t seem to be in the offing. But credit committees exist in all of these firms, and they could definitely tighten up their credit standards.

Money flies out of bond funds as bull market ends

Some investors are pulling out but others will still relish a stable income

Owen Walker

Bond funds hoovered up cash for more than a third of a century as investors were drawn by their promise of modest, reliable returns that balanced out their allocations against more adventurous asset classes.

But as global monetary policy tightens and central banks promise further interest rate rises, many commentators have called the end of the 36-year bond bull market. The most popular fixed income funds are losing their lustre.

“Clearly market sentiment towards bonds has deteriorated,” said Andreas Utermann, chief executive of Allianz Global Investors, the €498bn fund house that has 40 per cent of its assets in fixed-income products. “Some investors who were in bond funds because they thought they were in a 30-year-plus bull market will pull out, but investing in bonds is also about receiving a stable income.

”Of the 20 funds with the biggest outflows in the US for the first three months of the year, nine were bond funds, with several others also investing in fixed-income assets, according to Morningstar.

The data provider’s list includes the $32bn iShares iBoxx dollar investment grade corporate bond ETF, which suffered $5.7bn of outflows; the $14bn iShares iBoxx dollar high yield corporate bond ETF, which lost $3.2bn in redemptions; and the SPDR Bloomberg Barclays high-yield bond ETF, from which investors withdrew $3.2bn.

Several large mutual funds also suffered heavy redemptions. Among them were Franklin Templeton’s $78bn income fund with $2bn of outflows; T Rowe Price’s $30bn new income fund, $2.5bn of outflows; and BlackRock’s $14.8bn high-yield bond portfolio, $1.9bn of outflows.

Detlef Glow, head of Emea research at Lipper, the data company, said it was no surprise that the biggest bond funds are among those suffering most from the turn in sentiment. “That’s the nature of the beast,” he said. “If you make the majority of the inflows, you will probably make the majority of the outflows.”

In Europe, more than half of the 20 biggest bleeders in the opening quarter were fixed income funds. The list includes Amundi’s €10.7bn 6 M fund, with €874m outflows, and Jupiter’s €9.5bn dynamic bond fund, with €1.3bn outflows. Europe’s biggest fund, Pimco’s €59bn GIS income fund, recorded inflows of €697m over the quarter but had outflows of €616m in February and €548m in March. The fund was Europe’s fastest-selling last year, attracting €41.5bn.

Dan Ivascyn, chief investment officer at Pimco, said he did not believe the tide has turned on his company’s flagship fund. “We don’t focus on flows other than to the extent that meeting the liquidity needs of our end investors is always of the utmost priority,” he said. “We think it’s a very attractive environment for these more flexible bond mandates — not just Pimco’s income fund but products that can take advantage of a global opportunity set, which is about $100tn in size.”

The income fund follows an unconstrained strategy, which means it is not confined to traditional bonds but can invest freely in assets as diverse as mortgages and higher yielding debt instruments.

Market volatility in the first couple of months of the year revealed that equity and bond prices were no longer negatively correlated. For three weeks running the S&P 500, the US stock market index, fell and the yield on the 10-year US Treasury note rose, sending bond prices lower. Investors had been used to equity and bond prices moving in opposite directions and positioned their portfolios accordingly. Commentators have said that inflationary pressures have brought an end to the inverse relationship, which has caused investors to reassess fixed income allocations.

Many of the funds being hit by big outflows have also suffered market losses. Franklin Templeton’s income fund, which bled $2bn of investor money, recorded a $2.4bn loss in the first three months, while iShares’ investment grade corporate bond ETF, which suffered $5.7bn of outflows, made a $1.3bn loss.

Large institutional investors have also suffered from underperformance of their fixed income holdings. For example, ATP, the Danish pension fund with $123bn of assets, saw its holding shrink 1 per cent in the first quarter, having risen 29.5 per cent in 2017. This was largely due to a €230m loss on its bond and mortgage investments. It was the first quarter in four years that the scheme had posted a negative return.

In announcing the results, Christian Hyldahl, chief executive of ATP, said: “In a difficult market, a negative return of 1 per cent for the first quarter of the year was satisfactory in light of the very high returns realised in 2017. The result indicates that returns are about to be normalised as central banks place a tighter hold on liquidity and ramp up interest rates.”

Bond funds were the fastest-growing asset class in Europe last year, attracting €289bn, according to Lipper. They are much less popular this year though. Bond products attracted just €10.8bn of new money in the first quarter, with €3bn of outflows in March. Beneath the overall figure, there is a wide dispersion in how different categories of fixed-income assets fared.

Investors have pulled billions of euros out of funds focused on developed market corporate bonds and moved into products investing in emerging market debt. US high yield and European corporate bond funds suffered the biggest outflows, at €7.5bn and €5.3bn respectively. At the other end of the spectrum, emerging market local currency and hard currency funds each scooped up €6.7bn.

“Increased volatility at a company level impacts the corporate bond side and there has been a shift into higher yielding safe havens as a result,” said Mr Glow. “Investors are not necessarily going out of the bond market altogether.”

Mr Utermann said that while some investors may have reduced their exposure to fixed income, others may be more attracted to the asset class. “While there might be a change in sentiment and outflows, I do not think rising yields mean that investing in bond funds is not an attractive proposition,” he said.

“There will be other people who sat on the side lines and now they are seeing yields rising they will move in. It would be facile to say that just because yields are rising it should result in big outflows. It might just mean there is a shift in who owns bond funds and their reasons for doing so.”

Goldman Sachs shares end lower for record 10th day

Long losing streak is the worst since the investment bank floated in 1999

Peter Wells in New York

© FT

Goldman Sachs shares notched a 10th consecutive decline and their longest losing streak since becoming a public company amid a recent sell-off for financials and concerns about investment banking deal flow.

Down 0.7 per cent at $230.21, the Wall Street stalwart was the outlier among financial stocks on Tuesday, with the KBW bank index up ¼ of 1 per cent and the S&P 500 banks index 0.2 per cent higher. The benchmark S&P 500 closed 0.4 per cent higher today.

The 10-day losing streak is Goldman’s longest since it went public in May 1999, according to analysis of Thomson Reuters data by the Financial Times. Moreover, the stock has only closed higher in one of the past 13 sessions.

This decline surpasses the nine-day losing streak it endured back in May 2008. And it also tops the eight consecutive falls recorded at the height of the financial crisis, when Lehman Brothers went bankrupt, Merrill Lynch was sold to Bank of America and American International Group was saved by a multibillion dollar government bailout.

Guy Moszkowski, analyst at Autonomous, said the pullback could relate to the recent run up in Goldman shares, which rose 10 per cent between the start of July and the end of August.

“If I look at the charts for Morgan Stanley, Citigroup, or JPMorgan for the last 10 days they don’t really look all that different,” he said.

“That said, the equity market overall has been under pressure and if you look at investment banking transaction flow since the start of the quarter it hasn’t been good. Meanwhile estimates for Goldman Sachs had been going up since late July . . . Maybe investors are concerned that trend will reverse”.

Over the past 10 sessions, Goldman shares have shed 5.1 per cent. That compares with declines of 4.1 per cent for Citigroup, 2.9 per cent for Wells Fargo and 2 per cent for JPMorgan, which are the three-worst performers in the S&P 500 banks index over that period.

Goldman, though, is a member of the S&P 500’s diversified financial index, and is doing better than only E Trade, Franklin Resources and T Rowe Price over the past 10 sessions.

A former Goldman partner raised ethical concerns before leaving the bank in 2015, the New York Times reported on Tuesday, citing people close to the matter.

Goldman shares are down 9.6 per cent so far in 2018, but down 15.8 per cent from their record closing high in March.

Additional reporting by Laura Noonan

Germany and Russia: The Long Dance

Perhaps this time is different.

By George Friedman

Russian President Vladimir Putin and German Chancellor Angela Merkel met last weekend at Meseberg, the guesthouse of the German federal government. Expectations for the meeting, on both sides, were rightfully low. But the meeting comes at a time when both the Germans and Russians are redefining their place in the international system, which for them also means redefining their own relationship. In the 20th century, shifts in the Russo-German relationship tended to have profound consequences for Europe. It’s worth considering what it could mean this time.

Contemporary Europe originates in the early 1990s when the Soviet Union collapsed and the Maastricht Treaty creating the European Union went into effect. For the Germans, these two events meant that their primary interest was no longer the defense of Germany against the Soviet Union, and therefore their primary partner in said defense, the United States, was no longer central. Instead, Germany’s immediate problem was the reintegration of the former German Democratic Republic. Longer term, the focus was on turning the European Economic Community into more than a free trade zone and using the new tools of solidarity to ensure German economic interests. Given the paucity of strategic threats, Germany did not require a coherent security strategy beyond maintaining the EU, and its military capabilities, substantial during the Cold War, atrophied.

Germany’s relationship with Russia was primarily about access to Russian energy supplies. Since its founding, Germany has needed an industrial plant that was much larger than domestic consumption could support. Its industry allowed the German economy to surge and preserved social stability. Imperial Germany competed with the British Empire, selling to Russia, Austria-Hungary and southern Europe and buying natural resources from them. Nazi Germany attempted to create a similar structure, imposed by military force. Contemporary Germany remains dependent on imports of resources and exports of goods. The European Union is one leg of its strategy, and Russia has been another.

In the first decade after the Soviet collapse, Russia did not have a coherent strategy. It was, as a nation, in a state of shock, having freed itself from Soviet structures but having not yet built a new edifice. On the one hand, it needed economic relations with the rest of Europe. On the other hand, it needed to secure itself against foreign threats. The Russians, like the Soviets, pursued a strategy of strategic depth. They sought a neutral or pro-Russia buffer to the west – consisting of the Baltic states, Belarus and Ukraine – and to the south in the North Caucasus.

The encroachment of NATO into Russia’s western buffer and the South Caucasus created a strategic crisis for Russia. The development of a pro-Western government in Ukraine in 2014 was particularly alarming. To make matters worse, oil prices plummeted later in the year – a devastating development for Russia’s economy, which still relies on exports of raw materials. Russia’s strategic and economic position seemed to be unraveling.

The foundation of German national strategy has not quite unraveled, but it’s no longer as secure as it was. The EU is fragmenting along national and class lines. It remains Germany’s primary market for exports, but confidence that this will be permanent has been shaken. Now it is at odds with the United States, which is demanding more defense expenditure from Germany, along with the unstated demand that Germany take more risk alongside the United States. But the Germans have no interest in joining the U.S. in the Middle East, the South China Sea or North Korea.

Germany and Russia, then, both have problems with the global hegemon. These problems precede the Donald Trump administration and go deeper than politics and diplomacy. For Germany, the U.S. constantly wants to divert it from its primary interest (the EU) and creates regional friction – with Russia, for example. And for Russia, the Americans are extending their sphere of influence, particularly in Eastern Europe and the Baltics, with no visible motive except to threaten Russia’s security.

At the same time, Germany and Russia see potential benefits from cooperation. Germany’s economic and regional interests require oil and gas, which Russia has. Russia’s economic development requires foreign investment and technology, which Germany has. This is familiar ground. Germany and Russia explored cooperation between 1871 and 1914. Between the two world wars, Russia provided Germany with military assistance, allowing it to evade the Treaty of Versailles. From 1939 to 1941, they were bound by treaty and jointly participated in the invasion of Poland. Of course, both periods ended disastrously. In World War I, Imperial Germany devastated Imperial Russia. Similarly, despite the military assistance (the Treaty of Rapallo) and the 1939 Molotov–Ribbentrop Pact, Germany invaded Russia and brutalized it again during World War II. American power in West Germany helped avert similar bloodshed during the Cold War.

In short, the history of Russo-German relations since Germany’s unification in 1871 has consisted of tentative attempts at cooperation followed by catastrophic wars and near-wars. Neither country has forgotten that, but the temptation to try again, on the assumption that this time is different, is powerful. If history is consistent, then the U.S. is indispensable. It was U.S. lend-lease and the invasion on the western front that enabled the Soviets to defeat Germany in World War II. It was the U.S. that guaranteed West Germany’s security in the Cold War. Each has been, in a real sense, saved from the other by the Americans.

Of course, if this time really is different, then forming an understanding and pushing the U.S. out of the equation makes sense. But if it remains the case, as it was during the 20th century, that Russia needs buffers to its west, and Germany needs markets and resources under its control, then neither side really has a solid basis for cooperation. In that case, this looks like 1939, when the two sides signed a pact that they knew the other would betray, with the expectation that they would betray first, when the time was right. An alliance of those thinking themselves more clever than the other doesn’t usually end well.

But perhaps this time is different.

Has the Emerging-Economy Crisis Cycle Ended?

José Antonio Ocampo

turkey currency exchange lira crisis dollar

BOGOTÁ – Crises are nothing new for emerging economies, which have repeated the same patterns again and again, with often-devastating results. But have those patterns finally been broken?

Emerging economies have experienced boom-bust cycles in external financing for decades. The boom phase generates current-account, fiscal, and private-sector deficits – outcomes that are compounded by increases in domestic financing. Eventually, however, high debt levels lead to a loss of confidence and sharp cuts in external financing – a so-called sudden stop – producing balance-of-payments, fiscal, and financial crises.

Then, contagion sets in, as increasingly risk-averse investors, particularly short-term investors from developed-country markets, begin to withdraw funds from other countries to cover losses they incurred in the economies where the crises originated. With that, the crises spill across borders, affecting whole regions or even the entire class of emerging economies.

That is what happened in Latin America in the 1980s, when Mexico’s moratorium on external debt servicing in August 1982 sparked a region-wide debt crisis. The same thing occurred in East Asia in the 1990s: the crisis began in Thailand in July 1997 with the collapse of the baht, and quickly spread to other East Asian countries. It became a broad-based emerging-economy crisis in August 1998, after Russia imposed a moratorium on payments by commercial banks to foreign creditors.

The 2008 crisis played out a bit differently. It began in the developed world, with the fall of the US investment bank Lehman Brothers that September, and initially spread to emerging economies. But, after just over a year, the bust became a boom, as expansionary monetary policies in the developed world drove yield-seeking investors toward emerging markets.

The question that is now being hotly debated is whether this financing boom planted the seeds of a new emerging-economy crisis. We may soon learn the answer. After all, as history shows, all it takes is for one country to break down. Today, that country could be Turkey.

Last week, the Turkish lira plummeted, triggering the depreciation of more currencies, especially those of South Africa and Argentina, though all floating Latin American currencies also faced depreciation, as did those of the Czech Republic, Poland, Russia, and several East Asian countries, including China. Risk premia increased, and equity prices fell.

It is impossible to say for sure whether a new broad-based crisis is in the offing. After all, it would have been difficult to predict that the 1982 Mexican moratorium and the 1997 collapse of the baht would generate broad-based, protracted crises, or that the 2008 crisis would only briefly sweep up the emerging economies.

Nonetheless, there are reasons to think that old patterns may no longer apply. At its peak, during the week of August 8-15, the currencies of Argentina, South Africa, and Turkey depreciated by 8-14% against the US dollar. Yet the currencies of other emerging economies depreciated by no more than 4%.

This suggests that contagion is not taking hold as easily as it has in the past, and that broad-based sudden stops may be less likely. Even the most affected economies were able to limit the fallout of their currency collapses, with the Turkish authorities’ swift response to the lira collapse and the Argentinian central bank’s sharp interest-rate hikes having partly calmed markets.

This seems to reflect a new resilience to contagion that has formed over the last ten years or so. Emerging economies’ external financing was barely affected by the eurozone crisis, which peaked in 2011-2012, or the US Federal Reserve’s initial announcement, in 2013, that it would roll back its expansionary monetary policies. Even the commodity-price drop of 2014, which weakened the currencies of several commodity-exporting economies, brought no sudden stop in external financing. And the wave of capital flight from China in 2015 and early 2016 produced no broad-based effects.

This may be because investors are now taking a more nuanced approach to their analyses of country risk. Instead of painting all emerging economies with the same brush, they are accounting for each country’s economic fundamentals, domestic political stability, and relationships with others (for example, Turkey’s current diplomatic tensions with the United States).

So, judging by the limited contagion from the Turkish crisis, and from other recent episodes, it seems that old patterns may no longer obtain. But that does not mean that emerging economies are in the clear. On the contrary, they still have plenty to worry about, not least rising protectionist sentiment and trade tensions among major global powers. Smart policies, together with an improved global financial safety net from the International Monetary Fund, therefore remain of the utmost importance.

José Antonio Ocampo is a board member of Banco de la República, Colombia's central bank, professor at Columbia University, and Chair of the UN Economic and Social Council’s Committee for Development Policy. He was Minister of Finance of Colombia and United Nations Under-Secretary-General for Economic and Social Affairs. He is the co-author (with Luis Bértola) of The Economic Development of Latin America since Independence.