Joerg Asmussen, a member of the executive board of the European Central Bank, claimed that the tapering of American quantitative easing may pose a serious risk to the global economic balance, Reuters reports.
Many on Wall Street believe that the Federal Reserve will begin to terminate its bond repurchasing scheme, commonly referred to as quantitative easing, after its meeting later this month. This would signal an increased confidence in the U.S. economic turnaround. Though some economists are not sure that the move will go through, the mere speculation has had profound effects in currency markets already.
The currencies of many developing countries, such as India and Brazil, have dropped in value dramatically. When dollars were made cheap due to quantitative easing, many investors flocked to emerging markets to invest. Now that dollars appear to be headed for a shorter supply, many have withdrawn their money from these markets, causing the currencies to lose value. In addition, quantitative easing impacts bond values and yields, causing currencies to alter their value to adjust for this effect.
Asmussen expressed fears that quantitative easing tapering could cause the next global financial crisis, comparing the potential effects to the so-called Tequila Crisis that plagued Mexico in the mid 1990s. The Mexican peso devalued by 50 percent over the course of a week, triggering a massive U.S. bailout to prevent the entire Mexican economy from collapsing. Asmussen’s fear is that a similar course of events could happen in a country such as Brazil, India, or Indonesia.
Though the BRICS countries announced a $100 billion fund for currency stabilization during the G20 summit this past week in St. Petersburg, many have called the move just a first step towards countering a possible crisis, citing the need for additional measures if a run-in on one of the countries’ currencies occurs.
Asmussen outlined two major steps that major countries could take in order to avoid replicating the mistakes of the past. The first step, according to Asmussen, is the clear communication of information regarding how central banks are making decisions, including the outlining of specific, concrete goals and thresholds for actions to occur.
Asmussen also called for inflation expectations to be well-anchored, meaning that fears over massive inflation should not be given, or taken, lightly. In a way, this does not exactly appear to endorse the European Central Bank’s policy of forward guidance, by which they have claimed that interest rates will remain at historic lows of 0.5 percent for an extended period of time.
Though Mario Draghi, the ECB’s chief, has reiterated that the bank is committed to the policy, they have not laid out a specific guideline for when rates will rise. This is in contrast to the Bank of England, which has outlined a 7 percent unemployment rate as the time when they will consider a rate hike in the future.