Still this September, many emerging markets looked poised to survive the crisis - few had direct exposures to the toxic assets troubling advanced economies. Several EMs were struggling with high inflation and overheated economies during the summer. So isn't slowing external demand and falling commodity prices just what the doctor ordered?
Unfortunately, the downside risks to an EM seizure have greatly increased: since September, growth in industrialized economies has slowed down rapidly, while the deleveraging cycle has taken a turn for the worse. Western investors are increasingly worried about the strength of emerging markets in the current precarious scenario. As banks are desperately trying to take leverage off their balance sheets, asset prices are bound to sink - making the risky EM markets less enticing for investors.
Even sovereigns are not exempt from the increasing distaste for EMs. Moody's recently set Latvia, Bulgaria, Ukraine and Pakistan on a particular black list of vulnerable economies due to their reliance on foreign debt - as western lenders keep deleveraging, the sourcing of this debt is increasingly doubtful. Depending on how much longer the debt markets remain paralyzed, the more EM victims this crisis will take.
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