The Next Turn Down.(International Edition; BUSINESS)

Byline: Stefan Theil

No one has the money to rescue all the emerging markets, and the likely outcome is a steeper plunge.

As if Western governments and central banks weren't spending enough (some $7 trillion and counting) to prop up their sickly financial sectors and ailing economies, they are now having to bail out the rest of the world, too. In October, the Federal Reserve set up an unprecedented $120 billion credit line to Brazil, Mexico, Singapore and Korea to stave off a liquidity crisis in those countries. The European Central Bank has helped struggling Hungary with $7 billion, while Iceland and Latvia have stayed afloat only thanks to handouts from nations like Britain, Sweden and Germany. In December, the U.S. Treasury set up a joint $20 billion fund with China to keep global trade financed as Western bank loans to emerging markets dry up. All this comes on top of an accelerated pace of IMF emergency bailouts that have included, so far, Pakistan, Ukraine, Hungary and Iceland.

Clearly, Western governments are worried that the typhoon now hitting the emerging markets will loop back to an already weakened United States and Europe. So much for the theory that developing nations would "decouple" from the crisis, let alone help pull the West back out of recession. Instead, the meltdown in the rich countries' financial sector has hit emerging economies hard, and in many places at once: declining trade, cutbacks in foreign direct investment, lower remittances from citizens abroad. Portfolio investments have reversed as Russian and Indian investors seek "safe havens" in Western currencies and treasury bonds. As a result, the World Bank estimates the total flow from West to East in 2009 to collapse to half the 2007 peak of $1 trillion.

All this comes at the worst possible time--developing countries have a record $620 billion of long-term debt and interest coming due in 2009. Drowned in the emerging-market euphoria of recent years was the fact that, except for China and a handful of other surplus countries like the oil exporters, developing countries are still very much dependent on inflows of Western capital. This time, however, overextended Western banks are unable to supply it, as they struggle with their own painful deleveraging. What's more, Western governments are expected to issue $3 trillion in government bonds in 2009, three times the 2008 level, to finance their ever larger stimulus spending programs. ...