It’s back–the emerging market crisis that shook global markets just two weeks ago

Remember that emerging market crisis that whacked 10% out of the iShares MSCI Emerging Markets ETF (EEM) between July 31 and August 15–and even produced some anxiety in U.S. markets as the Standard & Poor’s 500 fell 2.1% from August 7 through August 15?

Well, it’s back. (If, that is, it ever really went away.)

The locus of the crisis is exactly the same: Argentina and Turkey.

Today the Argentine central bank raised interest rates to 60%–a jump of 15 percentage points–in an attempt to support a plunging peso. The move had only limited success as the peso finished the day down another 12% against the dollar. (It had been lower by as much as 20% during the day.) Yesterday the country asked the International Monetary Fund to speed up the disbursement of a $50 billion loan package designed to support the peso.

The Turkish lira fell again today after news of the resignation of the deputy governor of the central bank. Financial markets are worried that Turkish President Recep Tayyip Erdogan has compromised the independence of the country’s central bank. Turkey is dependent on attracting cash from overseas investors and traders to fund its balance of payments deficit. Global financial markets believe that the central bank has been behind the curve in raising interest rates in order to attract that cash as a result of pressure from President Erdogan, who has blamed an international conspiracy, headed by the United States, for soaring inflation in Turkey and this year’s 40% drop in the value of the lira. The deputy governor who resigned today, Erkan Kilimci, was a member of the central bank’s interest rate setting committee. The bank is scheduled to meet on interest rates in two weeks.

As was the case back in the first half of August, the crisis in Argentina and Turkey has led to fears that other emerging markets will be sucked into the turmoil. For example, Brazilian stocks fell 2% today and the real fell 1.2% to a near record low before the Banco Central do Brasil intervened to supported the currency.

The emerging markets crisis has two very different causes. First, there’s an extraordinary conjunction of political turmoil in countries as widely separated geographically as Turkey and Brazil. Second, there’s a negative feedback mechanism at work linked to the strong U.S. dollar. Foreign governments and companies have borrowed heavily in dollars. Which makes paying back these loans more expensive as a result of any rise in the dollar agains the local currency. Of course, fears that the local currency will fall or that local companies won’t be able to see their obligations just sends assets flowing into dollar-denominated investments–which leads to further declines in local currencies against the dollar. With the Federal Reserve likely to raise U.S. interest rates in September and again in December this flight to the dollar and out of local currencies–and the damage that will inflict on emerging markets–isn’t headed to a quick end.

The iShares MSCI Emerging Markets ETF finished down 2.63% today. The Standard & Poor’s 500 was lower by 0.44%.