We may be too euro-centric to notice there’s a big wide world outside and it does matter to follow and understand what is happening.

Up till just a few months ago, there was a eurozone that was bad and what we called BRICs (for Brazil, Russia, India, and China) that were good, with a growing economy and prospects of further growth ahead.

Today, we call these the EMs (the Emerging Markets).

And as we speak, they are all, in an unequal manner, under extreme pressure. Stand by for further turmoil in the coming weeks. Even though we are in the eurozone the contours of whose problems we well know, we should still be aware that EM turmoil may well set the world back where it was in 2008, in a rollercoaster crisis with no happy ending in sight.

In this case, there does not seem to be the cohesion, such as it was, that has brought together the disparate eurozone countries to battle the crisis out (much though so much remains to be done and there are risks ahead as well).

It wasn’t too long ago that emerging markets were seen as the saviours of the global economy. In 2009, when advanced economies’ gross domestic product fell 3.43 percent, emerging market economies grew 3.1 percent. Capital poured in – from investors looking for the only place they could actually grow their money to multinational corporations investing directly in facilities and equipment.

To simplify things, what has caused, is causing this huge tidal wave of crisis in the EMs is the decision taken by the US to ‘taper’.

According to the FT Lexicon, the word tapering in financial terms is increasingly being used to refer to the reduction of the Federal Reserve's quantitative easing, or bond buying programme.

A confluence of factors is causing the emerging market panic. The first, as we have just seen,  is the pull-back of stimulus in the US. Since September 2012, the Federal Reserve has pumped massive amounts of liquidity ($85 billion at its highest) every month into the global market in what has come to be known as “quantitative easing.” In December 2013, outgoing Fed Chairman Ben Bernanke announced the beginning of tapering – a $10 billion reduction in monthly bond buying. On January 29th, the Fed announced that it would reduce its bond buying an additional $10 billion, to $65 billion a month.

Much of the capital that the Fed was infusing into the market through its bond buying flowed to emerging markets. With the Fed tapering off quantitative easing, that liquidity is drying up. In other words, no more easy money. And that means that growth in emerging markets will, in all likelihood, be both more expensive, and slower. Potentially, the slowdown could become a crisis. 

The second factor causing emerging market panic is this: at the same time that liquidity is drying up, the economies of many emerging markets are slowing. Many analysts believe that the current sell-off was precipitated by a report showing a slowdown in China.

China is not only the world’s largest emerging market economy, but it is also the chief buyer of exports from other emerging markets. A slowdown there spells bad economic news for many.

Fear of weakening emerging market economies – and the panicked reactions that follow – is a bigger driver of currency depreciation than the weakness itself. It is irrational exuberance in reverse.

We’ve been seeing that phenomenon play out on the main stage for the past couple of weeks.

A cooling economy is exacerbated by the fact that worry breeds panic, and panic breeds crisis. In the midst of the Great Depression, President Franklin D. Roosevelt said, “We have nothing to fear but fear itself.”

·         Argentina – In January, the Argentine peso fell 23 percent. The most dramatic peso depreciation since the country’s 2002 financial crisis was triggered by the central bank’s decision to stop intervening in the markets to maintain the peso’s value – intervention that was increasingly costly, draining the country’s foreign currency reserves.

·         Turkey – The Turkish lira fell 6 percent in January; at its low point, the lira was down 9 percent from January 1st. On January 28th, the Turkish central bank took action to brace the falling lira, raising its benchmark one-week lending rate for banks from 4.5 percent to 10 percent. The lira rallied, then gave up those gains, and then recovered slightly.

·         South Africa – The South African rand fell 7.5 percent in January, its weakest level since 2008. The currency continued to fall even after the central bank raised its benchmark interest rate to 5.5 percent from 5.0 percent – the first rate increase in almost six years.

·         Russia – In January, the Russian rouble fell 7 percent, hitting a five-year low. But unlike the central banks in Turkey and South Africa, which have raised interest rates in attempts to prop up their currencies, Russia’s central bank has maintained a hands-off approach.

Even where central banks have taken action to stem the depreciation, “success is not guaranteed,” as The Economist put it. Theoretically, higher rates compensate investors for the additional risk they take on investing in weakening economies. The fact that these currencies continue to depreciate demonstrates that investors are unconvinced that the interest rate hikes are enough.

Furthermore, higher interest rates can be a double-edged sword, leading to further economic slow-down. The Wall Street Journal put it well: “Although higher rates are supposed to entice investors to continue investing in emerging-market currencies, analysts said the toll the higher interest rates may take on the economic growth of those nations may be too high.”