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Why the emerging-market crisis won’t spread


A new emerging-market crisis, to follow that of 1998, has surfaced. The immediate Argentine crisis will be resolved. The politicians there have proposed budget cuts that, if supported domestically and implemented, will provide some relief for a while. But this won't address Argentina's growth dilemma. That's a supply-side issue and the downside of a vastly overvalued currency. And it won't do the trick of getting interest rates down to levels where Argentina could grow either. As for Turkey, I have no hope that interest rates there can be got down to sustainable levels either.

So ultimately both Argentina and Turkey will be forced to devalue (in Turkey's case, again) and default (a move styled up as debt restructuring). There is not much the world can do about all this. IMF-style solutions have failed to achieve the triple objective for emerging markets like Turkey and Argentina of lowering interest rates, reviving growth and balancing the budget.

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