I've not been covering the emerging market currency crises too closely here, but it's worth saying that emerging market crises are rather scarier. When a crisis hits the financial sector of a developed market like, say, England, the government is considered such a rock-solid debtor that they can borrow essentially unlimited amounts of money to stage interventions. The banks basically assume that the crisis will not bring the state to its knees. If it did, everyone's got bigger problems than a couple outstanding loans. That's not really the case in emerging markets. Banks may not be particularly certain of Estonia's capacity to weather the crisis. They will not extend unlimited lines of credit, particularly not at a moment when they're as risk averse as they are right now. That's why its so important that rich countries and multilateral institutions get together to extend loans. The situation is made all the more acute by the fact that the last few years have seen the American economy essentially propped up as the world's emerging markets used us as a global bank: Most of these countries ran heavy surpluses (for reasons related to past crises, emerging markets have, at least according to Martin Wolf, grown relatively wary of current account deficits), and with American treasury bonds considered earth's safest investment, and pumped cash into our economy. Presumably, that money is going to shut off, or get called back, as they weather their own storm. Indeed, folks have long talked about what happens when China stops buying our bonds as if it would be an act of hostility. But this is the likelier scenario: China and other markets stop consuming our currency because they need to use their money for awhile. So at the exact instant we're entering recession, we may see a major source of capital inflows choke off. It's not a comforting thought.
