There's a sinking feeling in many emerging markets as the tap of cheap debt gets ready to be turned off, writes Glenda Kwek.
The fissures that have been quietly spreading through some of Asia's economies over recent months are now shaping up as yawning cracks. Emerging markets from Thailand to India plunged into the red amid a heavy sell-off, as investors reassessed the implications of another shift in the global economy.
India's currency, the rupee, has fallen to record lows against the US dollar. Currencies from Brazil and South Africa were also pummelled as investors fled back into US and European markets.
As the US Federal Reserve mulls winding back its super loose monetary policy, Asia is now faced with the prospect that the tap of cheap debt will be turned off.
The realisation of an end to the lavish spending that has been driving growth through the region has started to upend markets. In doing so, it has stoked memories of the bushfire that was the 1997 Asian financial crisis.
More worrying, some argue that if growth through Asia stalls, this could have serious implications for Australia, particularly as banks and miners have pushed deeper into the region over the past decade.
The Fed is tipped to begin winding back its $US85 billion-a-month stimulus program as early as next month, and currency flows are being turned upside down, moving out of emerging markets such as Brazil, India, Indonesia and South Africa and back to old world economies of the northern hemisphere.
"Countries that have grown credit rapidly over recent years, and have relied on easy global monetary conditions to drive domestic demand, may be at risk if global monetary conditions tighten," RBS senior currency strategist Greg Gibbs says.
"Over the last three years, people were looking for havens away from Europe and often emerging markets were broadly seen as that haven. So we are seeing some of that reverse where concerns around some of the fundamentals have shifted."
In just three months, India's currency has fallen 14 per cent against the US dollar, raising worries about the impact it will have on the country's substantial import bills and on an already large current account deficit.
Over the same period, the Indonesian rupiah has shed 12 per cent. Brazil's real has taken a hammering, falling 16 per cent, while the 7 per cent fall in South Africa's rand is in line with the Australian dollar.
Even so, the past week has delivered stark reminders of how sensitive Asia's so-called economic miracle remains to developments elsewhere.
Most of the focus has so far been on India and Indonesia, the two countries in Asia with the biggest current account deficits, making them the most reliant on foreign capital to make ends meet. The currencies and equity markets of both have plunged in the past week.
The Jakarta Composite Index has fallen more than 7 per cent this week. In India, the benchmark BSE Sensex is down 5.5 per cent.
In recent weeks, the Indian government has slapped import duties on gold and silver, and restrictions on the amount Indian companies can invest overseas without seeking approval.
The Reserve Bank of India is reported to have intervened in the currency markets to stem the rupee's fall.
The rupee's decline can be traced back to 2011, when gridlock around economic reform began to cast a shadow over the the India boom story.
In the middle of the past decade, India's annual growth was running at between 8 per cent and 9 per cent, but this year has slowed to little more than 5 per cent.
Others such as Indonesia have had to contend with a slowing China's falling demand for natural resources as the country moves away from investment towards a consumption-driven economy.
The Hong Kong-based head of Asian economics research at HSBC, Frederic Neumann, says even with the cracks, the current jitters are unlikely to evolve into a classic financial crisis.
"It's easy to draw parallels to 1997. But that would be misplaced," he says.
"Climbing US rates in themselves are not sufficient to knock out the region's financial system and spark a crisis that many apparently fear. At the same time, high leverage renders Asian growth a lot more sensitive to global financial conditions than in the past."
Neumann points to the events of 1994, when the Fed unexpectedly raised rates and US yields spiked. At the same time, Japan's central bank continued on its monetary easing path.
"That meant that liquidity in emerging Asia remained ample enough to sustain growth for a while longer. At the time, Japanese banks in particular helped to cushion the blow," Neumann says.
Even so, Japan's ultra loose monetary policy today doesn't mean Asia can shrug off the Fed taper jitters entirely.
"Financial conditions have undoubtedly tightened," Neumann says. "The result is that growth will limp along, unlikely to accelerate sharply any time soon. In most markets, debt levels are higher than in 1994, or at any time in the previous two decades.
"Higher funding costs, even if not prohibitive, are thus bound to weigh on growth. And there is little central banks can do to offset this - nor should they for their primary objective must surely be to curb even greater financial excesses rather than to boost growth artificially."
Australian executives have been watching the Asian roller-coaster over recent months but alarm bells are not ringing yet.
Insurance Australia Group for one has a direct exposure to India - it owns a 26 per cent stake in Indian insurer SBI General Insurance. The partner is one of India's biggest banks, State Bank of India.
But IAG chief executive Mike Wilkins plays down the importance of the plunge in India's currency this week for the joint venture there, which writes business in rupees.
"The strength of the currency is not necessarily a concern for us," Wilkins says. "It's a market that's growing very rapidly because even though the Indian economy is slowing, we're still seeing a significant emergence of middle-class consumers."
In contrast to the events of Asia, the severe slowdown in Europe has improved external balances and led to a large current account surplus for the euro.
Flows into European stocks hit a two-month high of $US755 million last week, figures from funds tracker Lipper show.
It was the largest inflow since mid-June, when a record $US1.17 billion was reached.
In the year to date, France's CAC 40 has risen 11.5 per cent, Germany's DAX 10 per cent, and Britain's FTSE 100 9.3 per cent.
In comparison, Hong Kong's Hang Seng has fallen 2.7 per cent, India's Sensex 5.7 per cent and Jakarta's index 2.2 per cent. Australia's S&P/ASX200 is up 10.4 per cent.
Wingate Asset Management chief investment officer Chad Padowitz says on a wider level, the Australian market is not seen as a source of opportunity by investors.
"For that broad index point of view, we see better opportunities elsewhere ... from the mining side, unless the Australian dollar drops significantly further from where it is now, there's not a tremendous level of upside left for the mining," Padowitz says.
The rise in positive sentiment on European markets has come as data show the region broke out of recession in the second quarter of the year, following six quarters of falls.
European powerhouses France and Germany have returned to growth, with Germany's economy growing 0.7 per cent in the second quarter of this year, while France's economy has expanded 0.5 per cent.
"The data counts as something of another watershed in the eurozone crisis," Commonwealth Bank's Europe economist Martin McMahon says. "The worst is comfortably in the rear-view mirror."
One thing that threatens to throw global growth awry is China.
While not entirely immune to global financial developments, its capital controls and the size of its market afford the country a degree of protection.
However, any rebound in growth is bound to be constrained by efforts to curb shadow financing. Even if regular bank lending expands, this may be insufficient to offset de-leveraging in other parts of the financial system that in recent years has provided the bulk of liquidity.
"In short ... Asia remains financially squeezed," HSBC's Neumann says.