Emerging Markets

China released its end-August reserves, and there isn’t all that much to see. Valuation changes from currency moves do not seem to have been a big factor in August, the headline fall of around $15 billion is a reasnable estimate of the real fall. The best intervention measures -- fx settlement, the PBOC balance sheet data -- aren’t out for August. Those indicators suggest modest sales in July, and the change in headline reserves points to similar sales in August. That should be expected. China’s currency depreciated a bit against the dollar late in August. In my view, the market for the renminbi is still fundamentally a bet on where China’s policy makers want the renminbi to go, so any depreciation (still) tends to generate outflows and the need to intervene to keep the pace of depreciation measured.* Foreign exchange sales are thus correlated with depreciation. But the scale of the reserve fall right now doesn’t suggest any pressure that China cannot manage. That is one reason why the market has remained calm. Indeed the picture in the rest of Asia could not be more different than last August, or in January. The won for example sold off last August and last January. More than (even) Korea wanted. During the periods of most intense stress on China, the Koreans sold reserves to keep the won from weakening further. Not this summer. The slow measured slide in China’s currency against its basket hasn’t translated into selling pressure elsewhere. And Korea is now quite clearly intervening to keep the won from strengthening. In July, the rise in headline reserves, the rise in the Bank of Korea’s forward book, and the balance of payments data all point to over $3 billion in purchases (the forward book, one of the best measures of what might be called Korea’s shadow reserves, matters; it rose by over a billion in July). There is only data for headline reserves for August at this stage, and this points to a further $4 billion in intervention. Scaled to Korea’s GDP, Korea bought about two times as much as China appears to have sold. And I would bet Korea’s forward book also increased, so the full count for August could be higher still. And with the won flirting with 1090, the level that triggered reports of heavy intervention in mid-August, the market quite reasonably is on intervention watch again. I am a long-standing fan of Reuters’ coverage of Asian fx markets. Reuters reported on Wednesday: "The won rose as much as 1.2 percent to 1,092.4 per dollar, compared with a near 15-month high of 1,091.8 hit on Aug 10 ... The South Korean currency pared some of its earlier gains as finance ministry officials said the authorities are ready to take action in case of excessive currency movements. The warning boosted caution over possible intervention to stem further strength ..." Taiwan’s rising reserves also clearly suggest that it too is buying foreign currency. All this is very different from periods of acute China stress. I should also note that with short-term external debt of around $100 billion and over $400 billion in reserves (counting its forward book) Korea is very well reserved by traditional metrics. It even has more than enough reserves on the IMF’s metric (p. 34 of the staff report), and the IMF’s new reserve metric tends to inflate Korea’s reserve need relative to traditional balance sheet measures: Korea has a high exports to GDP ratio and a relatively high M2 to GDP ratio. If you haven’t guessed, I am not a fan of the new reserve metric’s tendency to call on economies with large external surpluses to hold more reserves, relative to their economy, than their peers with external deficits. * China reportedly intervened a bit after the G-20 meeting for example, as some believe China will now resume a controlled depreciation.

This isn’t another post about Germany. Rather it is about Korea, in many ways the Germany of East Asia. Korea has a current account surplus roughly equal to Germany’s—just below 8 percent in 2015, versus just over 8 percent for Germany. Like Germany, Korea has a tight fiscal policy. Korea retained a structural fiscal surplus throughout the global crisis (it relied on exports to drive its initial recovery, thanks to the won’s large depreciation in the crisis).* After sliding just a bit between 2012 and 2015, Korea’s fiscal surplus is now heading up again. Korea’s public debt is below that of Germany. And as I noted on Monday, Korea’s real exchange rate is well below its pre-crisis levels. So for that matter is Germany’s real exchange ate. According to the BIS, Korea’s real exchange rate so far this year is about 15 percent below its 2005-2007 average; Germany’s real effective exchange rate is about 10 percent below its 2005-2007 average. The IMF—in its newly published staff report on Korea—recognizes that Korea has fiscal space, and encourages the Koreans to do a bit of stimulus. The IMF also, smartly, recommends beefing up Korea’s rather stingy social safety net. The Koreans though do not seem all that interested in spending more. Yes, there is officially a stimulus. But as the Fund notes it will be funded by “revenue over-performance”* rather than any new borrowing.** I think (based on footnote 26, on p. 18 of the staff report) that the “no new borrowing” stimulus is built into the IMF’s fiscal baseline. And that baseline, to my mind, should be characterized as an ongoing fiscal contraction. The central government’s surplus (using net lending and borrowing from table 2 of the staff report; other measures of the general government’s balance will show the same trend) rises from 0.3 percent of GDP in 2015 to 0.8 percent of GDP in 2016 and 1.0 percent of GDP in 2017. Korea’s external surplus is fairly clearly a function of policies that could be changed. Especially as Korea continues to intervene in the foreign exchange market. Counting the rise in its forward book, Korea looks to have bought over $3 billion in the market in July. And by all accounts it also intervened in August. The IMF is pushing in the right direction. But, for now, with no real impact. And that brings up another issue—sort of a pet peeve of mine. The IMF forecasts that Korea’s central government fiscal surplus will go up by about 2 percentage points between 2015 and 2020 (from 0.3 to 2.3 percent of GDP, using a measure that counts the surplus in the social security funds). The IMF generally believes that fiscal consolidation should raise a country’s external surplus (table 2, on p. 28). A 2 percent of GDP consolidation should—as a general rule, using the IMF’s standard coefficients—raise the current account surplus by about a percent of GDP. Yet the IMF is forecasting Korea’s current account surplus will fall by about 2 percent of GDP (from 7.7 percent of GDP to 5.6 percent of GDP) over this period. The issue is more general. The IMF is forecasting China’s (augmented) fiscal deficit will fall over the next five years. That directionally would tend to push up China’s external surplus. Yet the IMF is forecasting a significant fall in China’s current account surplus over the next several years (see table 2 and table 5). Japan is projected to do about two percentage points of GDP in fiscal consolidation in the IMF’s baseline forecast.*** Japan’s current account surplus is expected to be flat (it actually is forecast to fall a bit; see table 3). All this could happen. Fiscal policy alone doesn’t determine the current account (even if tends to be the biggest factor in the IMF’s own model). A boom in domestic demand, for example, would improve the fiscal balance and lower the current account surplus, just as a fall in private demand improves the current account balance while raising the fiscal deficit. And, well, a significant share of many countries’ current account is now coming from investment income earned abroad, and that can fluctuate in strange ways. But there is a potential adding up issue if all the large surplus economies in East Asia deliver on their planned fiscal consolidations. The first order impact of fiscal consolidation in all three should be a bigger external surplus in all three. By forecasting that away, the IMF runs the risk of understating the drag fiscal consolidation in East Asia might pose to global demand. * The data comes from the IMF’s WEO data tool, using either the series on general government net borrowing or the general government’s structural balance. ** The revenue over-performance smells a bit fishy to me. Revenues are basically where the IMF estimated they would be in 2015 (compare table 4 here to table 3.a here). The economy has if anything disappointed a bit. The Bank of Korea has eased. So it is hard to see why revenues over-performed unless they were initially under-estimated to build a bit of fiscal consolidation into the budget. *** Although it isn’t clear that the Fund actually expects Japan do deliver on the planned consolidation, now that Japan has pushed back the consumption tax hike -- hence the Fund’s desire for a series of small consumption tax hikes.

   

China is running a persistent current account surplus, one that could be larger than officially reported (the huge tourism deficit looks a bit suspicious). If China paid off all its external debt, it would still have around $2 trillion in reserves.* If it paid off all its short-term debt, it would have $2.5 trillion in reserves. And China has a very low level of domestic liability dollarization (3 percent of total deposits are in foreign currency) True, $3.2 trillion ($3.3 trillion if you include the PBOC’s other foreign assets, as you should, and as much as $3.5 trillion if you include the China Investment Corporation’s foreign portfolio, which is more debatable) isn’t $4 trillion.** But much of the fall in reserves over the last 18 months has stemmed from the use of reserves to repay China’s short-term external debt. The IMF projects that China’s short-term external debt will have fallen from $1.3 trillion in 2014 to just over $700 billion by the end of this year. Reserves are down, but—from an external standpoint—China’s need for reserves is also down. The two year fall in short-term debt is actually about equal to projected drop in reserves. The Fund though sees things a bit differently. Buffers, according to the Fund’s staff report, are now low, and need to be rebuilt. Some in the market agree. And that gets at a critical issue for China, and a critical issue for assessing reserve adequacy more generally. Just how many reserves do countries like China, need? For China, two “traditional” indicators of reserve adequacy—reserves to short-term debt and reserves to broad money—point in completely different directions. Reserves are over 400 percent of short-term debt (way more than enough). *** Reserves are now “only” 15 percent of broad money (not enough; 20 percent of M2 is the traditional norm). You cannot really fudge the difference; you have to tilt one way or the other. (Hat tip to Emma Smith of the Council on Foreign Relations’ Greenberg Center for Geoeconomics, who prepared the charts). I personally put more stock on balance sheet indicators, and reserves to short-term external debt is the most important. From a balance sheet point of view, there is also a strong case for paying attention to reserves relative to domestic sight deposits (a measure of liability dollarization). The Fund though sees things differently; in the design of the new reserve metric the Fund leaned strongly against balance sheet indicators of reserve need (see the discussion of liabliity dollarization here), and instead went with a composite of the three traditional indicators (short-term debt, m2, and imports—though the Fund prefers using exports), with an additional factor for longer-term external liabilities. The Fund’s reserve metric effectively says China needs to hold more reserves, relative to its GDP, than a typical emerging economy. Especially if China opens its financial account before its currency floats freely. And that is the case even though China has much less external debt than a typical emerging economy, and also has less liability dollarization of its financial system. Personally, I think foreign currency deposits pose more risks than domestic currency deposits, and, to the extent a country should hold reserves against the risk of domestic capital flight, those countries with more domestic foreign currency deposits should hold proportionately more reserves. The Fund’s metric, though, explicitly doesn’t adjust for liability dollarization. As a result, the Fund believes China needs to hold far more reserves against the risk of domestic capital flight than other emerging economies, including emerging economies with a lot more domestic FX deposits. The gap between the reserves China needs to hold on the Fund’s metric and the reserves other emerging economies need to hold is even more extreme in dollar terms; as the Fund’s metric requires the biggest emerging economy to hold more reserves than other emerging economies—remember that 20 percent of M2 for China is 40 percent of China’s GDP, or well over $4 trillion.**** One hundred percent of short-term debt by contrast requires reserves of $750 to $900 billion now. I will though give the Fund credit for now recognizing one obvious implication of its analysis of reserve adequacy: China needs to proceed cautiously on financial account liberalization, and the pace of financial account liberalization needs to be in synch with the process of domestic balance sheet repayment and bank/shadow bank recapitalization. *$3.5 trillion in reserves at the end of 2015, v $1.5 trillion in external debt, see table 2 of the IMF’s staff report. ** I will have more to say on this in an another post. There is a debate about the liquidity of China’s $3.2 trillion in reserves ($3.3 trillion counting other foreign assets). The key issue here is how China accounts for the foreign assets of China Ex-Im and China Development Bank (CDB). They shouldn’t technically be counted in reserves, but China’s hasn’t been completely clear on this point. The bulk of the evidence though suggests that China Ex-Im and CDB loans show up in the net international investment position in “loans” not as reserves, and that, to the extent these loans have been financed by entrusted reserves, those entrusted reserves are counted as “other foreign assets” in China’s SDDS disclosure of its foreign exchange reserves. In other words, the illiquid loans are not currently counted as part of China’s “foreign exchange reserves,” but rather appear elsewhere. China really should clarify this though. The IMF Article IV unfortunately did not shed new light on this issue. *** Data is from tables 2 and 3 of the IMF’s staff report, pp 40 and 41. http://www.imf.org/external/pubs/ft/scr/2016/cr16270.pdf China holds roughly three times more reserves than any other country. **** The IMF generally requires 5 percent of M2 in its composite metric, or 25 percent of the standard M2 to GDP norm. That rises to 10 percent of M2 for countries with fixed exchange rates, so long as the financial account is open. With M2 to GDP running around 200 percent thanks to China’s high savings rate, and with China’s GDP projected to rise above $15 trillion over the next few years, this soon won’t be an academic debate.

   

Korea is one country that unambiguously has fiscal space right now. Low government debt. The on-budget deficit was, until recently, more than offset by the off-budget surplus in Korea’s social security fund. With a slowing economy and a massive (almost 8 percent of GDP in 2015) current account surplus, Korea unambiguously should be running an expansionary fiscal policy. Read Summers and Eggertsson. But I do not quite see how "paying down debt" can be part of a true fiscal stimulus package. Nor do I see how a fiscal stimulus can do much to spur the economy if it doesn’t create a new borrowing need. The Wall Street Journal: "Unlike the heavily debt-funded supplementary budget last year, this year’s supplement will narrow the estimated deficit marginally, thanks to a partial debt repayment by the government. The finance ministry expects the country’s sovereign debt to stand at 39.3% of gross domestic product in 2016, lower than its initial estimate of 40.1%" Emphasis added. It seems like Korea’s stimulus will be financed by "surplus" tax revenues, not new debt. "The 11-trillion-won ($9.7 billion) additional budget will mostly be funded by surplus tax revenue and state funds left over from the previous fiscal year, the finance ministry said." I get it. Intentionally underestimating tax revenues (Korea’s economy hasn’t exactly boomed this year, which makes the revenue surplus a bit surprising) is one way of building a fiscal buffer into the budget. Without a supplementary budget, Korea presumably would have been on track to tighten fiscal policy this year. And if this year’s stimulus is financed in part from last year’s budget, then the size of last year’s stimulus probably was smaller than reported.* But please do not call less austerity a major shift in fiscal policy! Boosting demand growth and bringing Korea’s external surplus down will take a true shift in Korea’s fiscal stance, not the announcement of a fiscal stimulus that doesn’t really stimulate. * Japan’s Ministry of Finance sometimes has played a similar game at times, with "no-actual-new-borrowing" supplementary budgets marketed as stimulus plans. The net result is that it far harder than it should be to estimate the actual growth impulse from Japan’s fiscal policy, apart from the obvious negative impulse from the consumption tax hike. Headline announcements of new fiscal packages do not necessarily give rise to a positive fiscal impulse, as they often only offset what otherwise would be a fiscal contraction.

Turkey has long ranked at the top of most lists of financially vulnerable emerging economies, at least lists based on conventional vulnerability measures. Thanks to its combination of a large current account deficit and modest foreign exchange reserves, Turkey has many of the vulnerabilities that gave rise to 1990s-style emerging market crises. Turkey’s external funding need—counting external debts that need to be rolled over—is about 25 percent of GDP, largely because Turkey’s banks have a sizable stock of short-term external debt. At the same time, these vulnerabilities are not new. Turkey has long reminded us that underlying vulnerability doesn’t equal a crisis. For whatever reason, the short-term external debts of Turkey’s banks have tended to be rolled over during times of stress.* And, fortunately, those vulnerabilities have even come down just a bit over the last year or so. After the taper tantrum, Turkey’s banks even have been able to term out some of their external funding by issuing bonds to a yield-starved world in 2014, and by shifting toward slightly longer-term cross-border bank lending in 2015 and 2016 (See figure 4 on pg. 35 of the IMF’s April 2016 Article IV Consultation with Turkey) And while the recent fall in Turkey’s tourism revenue doesn’t look good, Turkey also is a large oil and gas importer. Its external deficit looks significantly better now than it did when oil was above a hundred and Russian gas was more expensive. Turkey doesn’t have many obvious fiscal vulnerabilities; public debt is only about 30 percent of GDP. Its vulnerabilities come from the foreign currency borrowing of its banks and firms. There is one more strange thing about Turkey. Its banks have increased their borrowing from abroad in foreign currency after the global financial crisis, but there hasn’t been comparable growth in domestic foreign currency lending. Rather, the rapid growth has come in lending in Turkish lira, especially to households. So the banks appear to have borrowed abroad and in foreign currency to fund domestic lending in Turkish lira. Bear with me a bit. Balance sheet analysis is interesting but not always straightforward. Turkish banks have significant domestic foreign currency deposits, and lots of domestic foreign currency loans.** The banks have added to their domestic foreign currency funding with a lot of short-term external debt (the data in the chart above sums cross border deposits and "short-term" loans by original maturity). And Turkey’s banks also have lots of liquid foreign currency assets on their balance sheet, some abroad but mostly in the form of deposits at the central bank. When you sum it up, domestic foreign currency deposits cover domestic foreign currency lending. The IMF staff report notes: “The sector’s loan-to-deposit (LtD) ratio stands at 119 percent, with the ratio at 89 and 142 percent for foreign (FX) and local currency respectively.”*** Why then do the Turkish banks borrow in foreign currency abroad, when, on net, they seem to just park the proceeds at the central bank? And how do they finance domestic currency lending with foreign currency borrowing without running an open foreign currency position? Turkey’s banks rely on two bits of financial alchemy. First, the central bank allows the domestic banks to meet much of their reserve requirement (including the reserve requirement on lira deposits) by posting gold and foreign currency at the central bank (this is the famous or infamous reserve option mechanism). That frees up lira to lend domestically.*** And second, the banks clearly rely on “off balance sheet” hedges (cross currency swaps) for a part of their funding. Look at the financial sector section of IMF’s staff report on pp. 23 to 26. The result is an interesting mix of risks. The banks ultimately need wholesale funding in lira, which Turkey’s central bank could supply in extremis—though with consequences for the exchange rate. The banks could also offset a loss of external foreign currency funding by drawing down on their liquid foreign currency assets. Monday’s Central Bank of Turkey (CBRT) press release notes that nearly $50 billion in liquidity sits at the central bank. But if the banks ever needed to draw on their foreign currency reserves, Turkey’s headline reserves would fall fast. A lot of Turkey’s foreign exchange reserves—which are not high to begin with—are effectively borrowed from Turkey’s banks. Makes for an interesting case. And it highlights a second debate of particular interest to me. What role should domestic balance sheet vulnerabilities play in determining the “right” level of foreign currency reserves for an emerging market economy? And what kind of domestic vulnerabilities matter the most, those from domestic currency deposits or those from foreign currency deposits? Specifically, should emerging economies with current account deficits and high levels of domestic liability dollarization (e.g. countries like Turkey) hold more reserves (relative to the size of their economies) than countries with current account surpluses and low levels of domestic liability dollarization (e.g. most East Asian economies, notably China)? This isn’t entirely an academic debate. The IMF’s new reserve metric—a composite indicator that is a weighted average of reserves to short-term external debt, reserves to all external liablities, reserves to exports, and reserves to domestic bank liabilities (M2)—effectively says that countries with large banking systems (like China) need to hold more reserves against the risk of capital flight than countries with heavily liability dollarized banks (like Turkey). And to get all wonky, this is because of the weight the IMF’s reserve index puts on the “M2” variable and the IMF’s decision to omit “foreign currency deposits” from its metric. There turns out to be large variance in the ratio of M2 to GDP across large emerging economies And for those countries, high levels of M2 to GDP are not, in general, correlated with high levels of liability dollarization, while a high level of M2 to GDP, it turns out, is correlated with a current account surplus. Let me be more concrete. M2 to GDP is about 200 percent of GDP in China. It is around 100 percent of GDP in Korea. And about 50 percent of GDP in Turkey. Five percent of M2 (the IMF’s norm for most emerging economies) works out to be roughly 10 percent of GDP in China, 5 percent of GDP in Korea, and 2.5 percent of GDP in Turkey. So there is a meaningful difference across countries. Ten percent of M2—the IMF’s norm for countries with fixed exchanges and open financial accounts—would work out to be about 20 percent of GDP in China. As a result, the M2 (broad money) variable drives much of the variation in the amount of reserves that large emerging economies need to hold to meet the IMF’s reserve norm. the following table, prepared by the CFR’s Emma Smith, decomposes reserve needs at the end of 2015. The IMF also has a somewhat cumbersome reserves data tool here. For countries with high levels of short-term debt and a low level of M2 to GDP, the IMF composite metric can have the effect of reducing the reserves that they need to hold relative to simple measures like reserves to short-term-debt. For example, in December 2015, when Turkey had a bit more short-term debt ($120 billion, by residual maturity) than it does now, the IMF’s metric would have been met with slightly fewer reserves ($115 billion) than Turkey’s short-term external debt. Conversely, for countries with low levels of short-term debt and a high levels of M2 to GDP, the IMF’s metric has the effect of raising needed reserves well above measures based on short-term external debt. China is the most obvious example, but not the only one. Turkey still needs to have a decent amount of reserves relative to the size of its economy to meet the IMF’s metric, especially after the lira’s 2015 depreciation. As it should given its large stock of external debt. I would argue it actually needs even more. $90 billion in foreign exchange reserves is low for a country with lots of foreign currency denominated internal debt (e.g. foreign currency deposits, which fund foreign currency loans) and lots of foreign currency denominated external debt. And I find it a bit strange that with the IMF’s metric China—even with a relatively closed financial account—needs substantially more reserves, relative to the size of its economy, than say Brazil or Russia. Brazil runs a current account deficit and Russia has significant domestic liability dollarization.**** The IMF argues—in its staff guidance note on the reserve metric—that there is no additional risk from high levels of liability dollarization. They didn’t find evidence of more or bigger runs in economies with dollarized liabilities. I am not sure I agree with their interpretation of the data on runs—I remember Uruguay’s crisis, and Ukraine lost substantially more reserves over the past few years than the IMF initially forecast in part because of a draw-down in its domestic foreign currency deposits.***** But more significantly, I would argue that the consequences of a run out of foreign currency deposits are much larger than the consequences of a run out of domestic currency deposits. There is a limit to the ability of most central banks to act as a lender of last resort in foreign currency.****** Technical stuff. But important. It has a big impact on who needs to hold what. * The standard explanation is that some of the funding comes from wealthy Turks with funds offshore. I though wonder if that is still the case given the magnitude of the banks’ external liabilities. ** Turkish firms have increased their foreign currency borrowing from the domestic banks from $50 billion in 2008 to around $180 billion now; the Turkish central bank helpfully provides all the data on this here. The resulting risks are well known. *** See table 6, on p. 44 of the IMF’s staff report for changes in the loan-to-deposit ratio over time. **** See the peer comparison on p 38 of the IMF’s staff report for Turkey, among other sources. ***** See Figure 9, p. 29 of the IMF’s April 2015 paper on reserve adequacy. ****** I tend to compare foreign currency debts to foreign exchange reserves—leaving out gold reserves. I followed that convention in the chart above. I am reconsidering a bit, given Venezuela’s apparent ability to borrow against its gold. But in Turkey’s case, I suspect most of its $20 billion or so in gold is likely borrowed from the banks (through the reserve option mechanism), and thus not really available to meet a foreign currency liquidity need.

Turkey’s failed coup looks set to deliver a substantial blow to Turkey’s already wobbly economy. It could also renew concerns, post Brexit, about global emerging markets more broadly. Late Friday, following initial reports that a coup was underway, the Turkish lira fell almost 5 percent, its steepest daily fall since 2008.  A broader sell-off seems likely on Monday, on the back of raised political uncertainty.  (My colleague, Steven Cook, puts the coup attempt in historical perspective here.) But economics also play a role here. With the growth outlook weakening recently, despite accommodative fiscal and monetary policy, and in the face of widening fiscal and external deficits, this weekend’s events are likely to contribute to a prolonged period of economic uncertainty. Notably: Following on the heels of the terrorist attack on Istanbul airport, this weekend’s turmoil look set to deliver a devastating blow to tourism revenue (already down 23 percent in May). The economy has been dependent on hot money inflows from abroad to finance a widening current account deficit. The government should be able to continue to fund itself, as its debt levels are moderate and local markets still supportive, but the possible, even likely, reversal of such flows could lead to a depreciating currency, higher inflation, and a spike in market interest rates. Watch Monday for signs of dollarization within Turkey for an early hint of how things are going. Growth of 4.5 percent in the first quarter appears artificial, driven by a 30 percent increase in the minimum wage and a recent easing in monetary and financial policies. According to the IMF, still-healthy trend growth of 3.5 percent is possible, but that would require substantially improved structural and fiscal policies. Inflation appears on the rise (7.6 percent in June, well above the central bank’s 5 percent target), and appointments by the government to the central bank board have weakened its perceived independence from the government and its anti-inflation fighting credentials. Today’s announcement by the government that it was coordinating closely with the central bank and news that the bank would provide unlimited liquidity to banks is smart crisis management, but could raise expectations that very easy monetary policy is in train. Turkey now could lose its investment grade rating, which will further weigh on investment and external debt prices. While it appears that portfolio investors are not overly exposed to Turkey relative to benchmarks, historically Turkish markets have been quite volatile following political shocks, and loss of the IG rating could lead to forced sales by investors that are mandated to invest in high quality assets. The constructive story about the Turkish economy has long been anchored around greater integration in the global economy, and specifically strengthened trade and financial ties with Europe. Such hopes--including the anchor provided by the ambition of eventual EU membership--already were being called into question following the Brexit vote, and any effort by the Turkish government in the aftermath of the coup to extend government authority or adopt more nationalistic economic policies likely would further dampen interest in the west in strengthening economic ties. More broadly, as I have noted previously, emerging markets have held up impressively in the aftermath of the Brexit vote last month. (Notably, Turkish stocks were up 15 percent this year prior to Friday’s events.) Firm expectations that U.S. interest rates will stay low, as well as evidence that stimulus measures in China were boosting growth, have keep these markets well anchored. Turkey’s importance in global markets on the surface appears small relative to these factors, so its reasonable to expect that Turkish markets eventually will find their footing and the risks will remain local. But any sense of a significant economic problem in Turkey, an important and liquid emerging market, could pull an important prop out of the benign emerging market story. That could be the economic legacy of this weekend’s events.