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Currency devaluation ‘easy’ answer to emerging market crisis – Saxo Bank chief

Published time: January 30, 2014 15:48
Reuters/Lucas Jackson

Reuters/Lucas Jackson

The emerging market currency crisis is being propelled by policymakers who are “seeking the easy answer” by devaluing their currency, which is an unsustainable global model, Saxo Bank CEO Steen Jacobsen told RT.

The spectacular loss of value in emerging market currencies – the South African rand, the Russian ruble, the Indian rupee, and the Turkish lira- is a result of government's tightening monetary policy, which has even further driven down the value against the euro and dollar.

Governments face huge monetary policy decisions in the third and final stage of the global financial crisis which kicked off in 2008 with America's sub-prime mortgage crisis and spilled into Europe, but simultaneous devaluation of currencies in the hope of driving up exports can’t be universally applied, says the Saxo Bank chief.

“We are in the final part of this cycle. Which comes next is probably the mandate for change. We all need to change, the export-driven business model isn’t sustainable,” Jacobsen told RT in an interview at his Moscow office.

2013 has been a train wreck of a year for emerging currencies, which are taking a huge beating from the euro and dollar as their respective economies regain post-crisis strength.

India’s rupee has had one of its worst years ever, and in 2013 lost 11 percent against the dollar. The ruble has hit a 5-year low against both the dollar and euro, soaring above 48 rubles against the euro, and over 35 rubles against the dollar.

The rand hit a 5-year low at 11.3785, the highest since October 2008. The Turkish lira and Mexican peso fell in response to the big dip.

Devaluation is being fueled by policymakers in emerging markets. In an effort to make the ruble a free-floating currency, the Russian central bank is cutting its monetary intervention and increasing the boundaries of a currency corridor, which is sending the currency to record lows against both the euro and the dollar.

“Policymakers are always seeking the easy answer, and the easy answer right now is weakening the currency. But by doing that you have to remember that the only reason anyone buys into an emerging market is because you expect the currency to appreciate. Pursuing devaluation long term will hurt the appetite of long term investors,” Jacobsen explained.

“We don’t need to go to a full-blown crisis mode here,” Jacobsen said, but warns if all emerging markets pursue similar devaluation strategies, nothing will change.

Spencer Platt/Getty Images/AFP

“The only thing we have learned from this crisis is that we have learned nothing in the sense that we lack reforms, every political country needs reform,” he said, adding, “we all need to change, because the export-based business model isn’t sustainable.”

Knocking down a currency is a policy tool that is accessible, quick, and a bit of a “dirty” maneuver, according to Jacobsen, and is a main stumbling block in the way of real economic reform.

“In history, the only change that we have comes from crisis. We need the crisis to create a new and better mandate for change.”

US not to blame

America’s monetary policy has been at the center of the blame game over the huge amounts of investment that has spilled out of emerging markets, and for the severe currency losses in Brazil, Indonesia, Turkey, India, South Africa, and Russia. However, Jacobsen says the blame shouldn’t all be thrown on Uncle Sam.

In the case of the ruble, “at least 50 percent is internally driven, and the rest is external factors. The crisis you see in the ruble is driven by Russian politics.”

Jose Vinals, the director of the IMF’s monetary and capital markets department, said Tuesday the volatility in global markets is caused by problems in particular developing countries and not linked to the US Federal Reserve's decision to reduce its monetary stimulus.

Comments (8)

 

BIG-ONE5 31.01.2014 18:54

China and U.S and E.U are NOTORIOUS for dumping currency. It's called "Super counterfeit". It looks so real that even pass most tests everywhere. Result? Lower currency value. Because there is sooo much, that the value of the currency goes down. Other is internet encryption of moneys transfer. That's how AIPAC devalued Iran's currency. Once an investigation in U.S, leads took them into China, a high power official. What he said? You did the same to China. Why should we stop? Why they do it? During stabilization there is a window to buy below price or sale above. A small window.

 

BIG-ONE5 31.01.2014 18:49

But this articleis right. Decisions taken DO affect the dollar value, including all the rest. What's confused is how. So to 6th graders, I will only say basic. The currency values are because supply and demand. ok.
Now when stimulus is eliminated, less dollar or any coin..is produce. Result? Less currency creates an effect, that makes the competency and fight for that currency more hard. Like a rare car. Get hitler's train and auction it..See what I mean. A 100,000 train will be 1 billion. Only one available see? Currencies are the same.. But there are other factors

 

BIG-ONE5 31.01.2014 18:43

Let's see kiddo's,
Last time I was into economy class we discussed this isuues, the 2008 DOMINO effect, and monetary policies world wide. was a 4 month bitter course. LOL. ( you could hear the flies)..And this differs somewhat with the reality spoken. We even dicussed how a Clinton policy changed U.S economy overnight. Although, I argued it wasn't his economist or him. But teachers believed that Clinton policy could had AID. Reason Obama jired the guy that was with Clinton. I bet he don't have an idea of what went on.LOL Well, he didn't made any difference.

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