Monday, November 03, 2008

Emerging Market Risks Are Rising Rapidly - S&P Downgrades Many Middle Eastern Country Banks

We wrote about great risks in the oil-intensive economies of the Middle East during this cycle's boom. And, the casino-like behavior in many of their markets. And, we highlighted that many firms such as Goldman Sachs and Morgan Stanley were making large bets, or investments in these markets. Yesterday it has been reported that S&P has started downgrading banks in this region. It was just last week that Kuwait had to step in to save its second largest bank.

It is fair to assume many of these bets will go bust and the oil-intensive states of the Middle East will have unprecedented economic crises in the coming years.

A difficult to quantify risk we shall see develop in some form is that of investment or bets by largely mature and comparatively stable economies and global corporations into emerging markets and what consequences unfold if these bets go bad on a large scale. One generalization we can make is that were these substantial risks to come to pass, foreign investment in these markets would dry up for a life time or longer thus extending economic malaise and volatility in emerging markets. This would obviously be compounded by the lack of global capital we shall see for some extended period of time. Another might be that mature economies and/or their global corporations could selectively default on obligations to emerging markets in response to such an outcome. Especially if emerging markets are unable to somehow help recoup these investments through action or reform. That may sound historically unusual but then we aren't dealing with a usual business cycle and neither are we dealing with usual outcomes. And, for that we see most still do not factor global risk into their analysis.

We were more focused on emerging market risks than any blogger, news source, financial firm or economist while Goldilocks was discounting her Utopian future. For, failure to do so is failure to understand that investment returns are risk-adjusted - something that we can clearly quantify as not well understood by this generation of investors or leaders. And, we highlighted the similarities between many emerging markets today and pre-war Germany in the sense that global corporations embraced both. They did so because corporations naturally gravitate towards any market, free or otherwise, that embraces capital, not because corporations were intelligently assigning risk. In today's world many emerging markets are very similar to pre-war Germany in the sense that capital is king as long as it is subservient to the interests of the state. And, so it goes.
posted by TimingLogic at 6:01 AM

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