'A Full-Blown Crisis'.(International Edition; GLOBAL ECONOMY)

Byline: Stefan Theil

Emerging markets were supposed to save the world with their fiscal responsibility. So much for that.

Last week seemed to be the nail in the coffin of "decoupling," a theory that said increasingly savvy and solvent emerging markets would no longer march in economic tandem with more-developed nations. As the global financial crisis deepened, South Korea announced a $130 billion bailout for credit-starved banks and companies, Ukraine canceled elections amid a growing national crisis over frozen credit markets and a plummeting currency, and Pakistan asked the International Monetary Fund to arrange emergency financing amid the country's worsening economic meltdown. All this came after a torrent of ratings and outlook downgrades by agencies like Fitch and Moody's on former shooting stars such as India, Vietnam, Hungary and Argentina.

What happened? Only a few months ago, emerging economies were considered islands of stability and rectitude in a largely Western crisis. Some boosters even thought they would save the world from recession. After a series of economic implosions in the 1990s, their governments had shored up their national balance sheets, paid off the IMF and built up Significant rainy-day savings. Now currencies are imploding (the Korean won is down 33 percent against the dollar), capital flows are drying up and central banks from Asia to Latin America are drawing down their reserves to prop up currencies and rescue their credit-starved banks and exporters. Risk premiums on emerging-market country bonds have more than doubled since August, and in some cases, like Iceland and Pakistan, investors have begun to worry about default. Emerging-market equities have gotten clobbered this year relative to the Dow. David Roche, president of the London investment advisory group Independent Strategy, says, "We're heading for a full-blown emerging-markets crisis."

It turns out that vital parts of many countries' economic success have been as unsustainable as an American zero-down, adjustable-rate mortgage. For example, much of their stellar growth has been fueled by an outsize dependency on the foreign capital and credit that is now rapidly drying up. In 2007, this inflow of ...