A CENTRAL bank doubles interest rates after an emergency meeting at midnight. A country is forced into a big devaluation as foreign-exchange reserves dwindle. Recent events in Turkey and Argentina have eerie echoes of the early stages of the 1997-98 emerging-market crisis. That disaster started with isolated problems in Thailand. But it morphed into a general crash, as investors fled all emerging-market assets, currencies collapsed, economies slumped and foreign debts proved unpayable. Could 2014 bring a repeat?

 Optimists, whose ranks include the International Monetary Fund, say no. They argue that most emerging markets are far less vulnerable than they were in 1997. They have flexible exchange rates; their reserves are higher (a whopping $7.7 trillion in total); their current-account deficits are smaller (only two of the 25 emerging markets tracked by The Economist have a deficit above 5% of GDP); their debts are lower and more likely to be denominated in domestic currency.
Pessimists, many of them on hedge-fund trading desks, put more weight on factors that make emerging-market assets less attractive, particularly the prospect of higher interest rates in America and slower growth in China. After years of chasing yield in risky places, many American investors are bringing their money home (see article). And after years of booming credit growth, emerging economies have new vulnerabilities: complacent politicians, high corporate-debt loads and banks that are dodgier than they appear.

 On balance, this newspaper sides with the optimists. The days of easy money are ending, but slowly. Most emerging markets are less vulnerable than they were 15 years ago, and are building up their defences fast. The wild card is panic. Even if the economic fundamentals do not warrant large-scale flight by investors, currency crises can become self-fulfilling, particularly in relatively illiquid markets.

 Most emerging-market currencies have slid in the past week, but the real pressure has been on a few countries with glaring weaknesses, such as Argentina (high inflation, erratic government) and Turkey (high inflation, gaping deficit, political upheaval). The differentiation is encouraging. So, too, has been emerging economies’ response. By and large policymakers have used market turmoil to push through more reform. 

 Central banks that took their eye off inflation are toughening up. On January 28th India’s central bank raised rates for the third time in five months, and made clear it was moving towards an inflation target. Turkey’s central bank scrapped its daft monetary policy for a more orthodox one, and jacked up interest rates. There is more to do: in too many emerging markets real interest rates are still negative. But the direction is the right one, and most countries are moving fast.
Yet these countries are not wholly in control of their currencies’ fates, for the flow of capital into and out of emerging markets has far more to do with what happens beyond their borders than with what they do at home. When the Federal Reserve raises rates in America, emerging economies often hit trouble, particularly if the rate increases are rapid. 

 Fortunately, that is unlikely today. The Fed is slowly cutting back the monetary morphine—at its meeting on January 29th it cut its monthly bond-buying by another $10 billion—but the odds of precipitous tightening are small. The Fed’s new chairman, Janet Yellen, has made clear that it will keep its policy rate near zero until America’s labour market recovers. And that means more than just a lower jobless rate.


Bears in a China shop


Equally, the chances that trouble in China will fell other emerging economies are low. Sharply slower Chinese growth would hit commodity exporters elsewhere, but there is no sign of such a sudden slump. It is true that China’s financial system faces mounting difficulties, but the government has the capacity to bail it out. 

 The country’s huge stash of savings means that internal bank failures do not have a direct economic link to the rest of the emerging world. It is only nervy investors who see a connection between a failed Chinese shadow bank and tumbling currencies elsewhere.

 If enough investors get nervous, money will flood out, currencies will fall and a gradual tightening could become a sudden rout. But there is no reason for American interest rates to rise fast, and no reason why emerging economies cannot adapt to a world in which rates gradually climb.