Beware of falling victim to core periphery disease

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From Dr Jerome Booth.

Sir, Many people suffer from the delusion I call core periphery disease. This is the belief that the core (the US, western Europe, Japan) affects the periphery (emerging markets) but that we can ignore the impact of the periphery on the core. I’m afraid your editorial “Tropical winds on emerging markets” (January 30) also suffers from it.

Yes, emerging markets might see more volatility and there are those (particularly with short time horizons managing other people’s money) who think volatility – as opposed to large permanent loss – is the only important measure of risk. Hence the impulse to sell emerging markets and buy US Treasuries.

Your editorial correctly calls for more transparent and credible anti-inflation central bank policy and structural reforms in emerging markets. But it misses another response. Core periphery disease is indicated by the concern over current account deficits and large debts in emerging markets without reference to far larger debts in the core countries – debts, moreover, owed in large part to emerging central banks. These central banks, if aggravated much more, can simply shift their reserves away from Treasuries and eurozone government bonds and into now cheaper emerging market equivalents – excluding a few like Argentina which really do have some default risk.

Emerging market central banks own 80 per cent of global reserve assets. Debt/gross domestic product in the Heavily Indebted Developed Countries (HIDCs) is about 10 times that in the emerging world. People don’t mind being robbed of their savings slowly, apparently, which is why they buy Treasuries. For me a sell-off in emerging markets just looks like an opportunity.

Jerome Booth, New Sparta, London WC2, UK

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