The last thing that financial markets need now is another shock. But the world's emerging markets could provide one.
"Investors should not ignore the possibility of a future crisis in emerging markets," said William Rhodes, vice chairman of Citigroup and a veteran of debt crises in developing countries since the 1980s.
While stock markets in major industrial countries have, as a whole, recovered most of their losses since the terrorist attacks, emerging stock markets have come back only slightly. The flow of foreign capital, the lifeblood of many of these economies, is expected to slow sharply this year and rebound only a bit next year. Two countries in trouble, Argentina and Turkey, are expected to have US$23 billion more withdrawn than invested this year.
If a new crisis does develop, however, the US and the International Monetary Fund are likely to react more quickly -- particularly in predominantly Muslim countries -- as the pressing need to fight terrorists sweeps aside objections by the treasury secretary, Paul O'Neill, to the rescues of the past.
"The money will be a lot more forthcoming, especially to frontline states, especially Turkey but also Indonesia and Pakistan," said Desmond Lachman, director of emerging-markets economic research at Salomon Smith Barney.
Horst Koehler, the managing director of the International Monetary Fund, made clear in a statement on Oct. 5 that the IMF knows how difficult times could be for emerging-market countries and is ready to help. "The IMF," he said, "is prepared to play its role of providing advice and additional financial support, where necessary, to those members that have [or adopt] suitable policies, as part of a joint international effort to strengthen confidence in the global economy."
Michael Pettis, a finance professor at Columbia University who specializes in emerging-markets financing, said, "Washington is looking for the quickest solution to anything."
Something bad may not happen immediately. Because investors have been fleeing emerging markets for most of the year, there is no threat of a sudden, destabilizing exit. And some measures of emerging-market stress are not as high as they have been in the past. But America's attack against terrorism has added more uncertainty to the outlook. Many analysts agree that 2002 will be a difficult year for emerging markets.
"I think emerging markets remain vulnerable," said Joyce Chang, global head of fixed-income research at JP Morgan. And although there is no imminent threat of default in Argentina or Turkey, she said, "There are medium-term concerns going into 2002."
The outlook for the economies and the stock and bond markets in Argentina, Turkey and other emerging-market countries -- from South Korea and Thailand to Brazil and Mexico -- was worsening before the Sept. 11 terrorist attacks
"For all emerging markets, the situation will be harder because of the consequences on trade and tourism and on the level of economic worldwide," said Domingo Cavallo, the economy minister of Argentina.
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