The Spark

“The emancipation of the working class will only be achieved by the working class itself.” — Karl Marx

Speculation Wreaks Havoc in Poor Countries

Feb 17, 2014

This article is from the February, 2014 edition of Workers’ Fight, the newspaper of the revolutionary workers’ group of that name active in Britain.

In the last week of January, the Argentinian national currency suddenly lost 16% of its value in a matter of just two days. This was explained away by blaming the “profligacy” of the Argentinian government and its “unaffordable” social programs.

However, Argentina isn’t an isolated case. Over the past months, the currencies of a number of so-called “emerging” countries have been nosediving: the Argentinian peso was the worst affected, with a 35% loss against the dollar, followed by the Turkish lira (22%), the South African rand (19%), the Brazilian real (17%), the Chilean peso (15%), the Indian rupee (14%) and many others.

What has been happening is that over the past years, following the sharp reduction in interest rates in the rich countries, a form of speculation, known as the “carry trade,” has reached a record level. This involves borrowing large amounts of money in the rich countries where interest rates are low and lending them to poor countries where the interest rates are much higher. These loans are then used in the local economies, mainly in real estate.

However, after several years of fat profits made this way, two factors started to reverse this flow of speculative capital: first the fear that the real estate bubble created in some poor countries might burst; and second, the fact that the policy of the U.S. Federal Reserve Bank is likely to result in a rise in interest rates in the rich countries.

Back in 1997, a similar mechanism caused a major financial crisis, albeit limited to South East Asia, with drastic consequences for the populations. The difference today, however, is that this is already affecting most poor countries – not just in South East Asia – and that this is taking place against the back-drop of a 6-year-long world crisis. And this may mean that this time the criminal irresponsibility of these speculators will aggravate the world economic crisis even further.