>Global Emerging Markets Beyond the Turbulence

■ EU Fiscal Crisis. A restructuring of Greece’s debt is likely long-term. While the short-term risk for Greece has eased due to the recent package, market pressures on the rest of the peripheral euro area may force new fiscal measures. On any further deterioration in this situation, GEMs will be hit via rising risk aversion, weaker trade flows and falling commodity prices;

■ Chinese Property Bubble. Our economists now believe that official efforts to bring property prices down could cut Chinese GDP growth by 3 percentage points in a full year. Signs of a property correction could, however, delay rate rises in China. Emerging markets that will lose out from slower Chinese growth are those that sell commodities (or other general exports) to China.

■ Massive Show of Force:
■ - €500bn from the EU (€440bn from SPV), over three years;
■ - €250bn from the IMF;
■ - ECB to buy up government and private sector securities in market;
■ - Reactivation of swap lines;
■ - More fiscal tightening to be imposed;
■ - Also, Greece (€110bn) package fully passed.
■ Conclusions/Thoughts
■ - Ireland, Portugal, Spain 3-year borrowing needs (€550bn) covered;
■ - Therefore, none of Greece, Ireland, Portugal, Spain need to go to capital markets;
■ - European (and EMEA) GDP forecasts likely to be cut;
■ - ECB not likely to raise rates until around mid-2011;
■ - Vicious circle of falling GDP, rising deficits not broken;
■ - Debt restructurings still likely in certain countries.
■ Policy Bind Remains: i) no flexibility of exchange rates (and the dollar is now rising); ii) no flexibility of monetary policy, therefore; iii) weak fiscal policy; iv) dubious economic data; v) truculent trade unions.
■ Contagion Model. Negatives from Greece situation: i) several countries with same symptoms; ii) expensive valuations (page 17); Positives: i) a ‘big wealthy neighbor’; ii) small equity market and economy; iii) no surprise; iv) immature bull market. The Big Unknowns: i) default?; ii) banking crisis?; iii) risk to global economy?

To read the full report: EMERGING MARKETS