“THE peso has gone to hell,” worried the Nobel-Prize winning writer V.S. Naipaul in an essay from the 1990s about Argentina. He also touched on Eva Perón’s sexual technique, beefsteak, class tensions in Buenos Aires and Jorge Luis Borges. Its limp currency is an elemental part of that South American country. And yet the news last week—that the partially pegged peso had dropped by 15%—has scared global investors. At Davos, a gabfest for the world’s biggest egos, the talk turned from Jamie Dimon’s enormous pay packet to worries about an emerging-markets crisis. Currencies in the developing world fell to their lowest level since 2009. Along with Argentina, so Turkey, South Africa and Russia have been hit hard. There is violence on the streets of Kiev and Bangkok. The scare dragged down the S&P500 by 2% on Friday, January 24th. Then Monday morning the Asian bourses fell.

Emerging countries have already had a recent walk on the wild side: from May to August 2013, after the Federal Reserve made its first, botched, attempt to start winding down its bond purchases. At the prospect of an end to free money, funds were pulled from emerging countries that have benefited from a decade of easy inflows, and currencies and stockmarkets tanked. During the last few months of the year however things seemed to have stabilised.

Crises have a habit of coming in fits and starts, though, rather than in one big bang. For instance Thailand ran into trouble in July 1997. Four months later South Korea’s president warned his countrymen of the “bone-carving” pain to follow an IMF bail-out. It took over a year for Russia to blow up; its default didn’t happen until August 1998. The last mini-crisis took time to come to a head, too. After Argentina devalued and defaulted in 2001, many argued it was a cranky special case. But by mid-2002 the contagion had taken Brazil to the brink.

Since the sell-off of 2013, doom-mongers may argue, two things have got worse. First it has become even clearer that the rich world’s central bankers do not have much of a clue how to tame the beast they have created in the form of ultra-loose monetary policy. Ben Bernanke, the outgoing Fed chief, chairs his last policy meeting on January 28th and 29th. The Fed is expected to trim its bond purchases by a further $10 billion, to $65 billion a month. No doubt this will be accompanied by a torrent of elegant verbiage to show that the Fed is in command. But sceptics should look at Britain, where the newish central bank boss, Mark Carney, has abandoned the framework he put in place only half a year ago. It was supposed to govern the pace at which monetary policy would return to an even keel. The process of normalising central banks’ balance-sheets is going to be mighty unpredictable and disruptive.

The second change for the worse is that the emerging world’s recovery in exports looks tepid. The hope had been that as the Western world grew faster it would suck in more goods from emerging economies, helping them to improve their current-account balances and making them less dependent on foreign capital inflows.

But the latest data are mixed on this front. In both Brazil and Turkey current-account deficits have widened since the summer. China’s exports grew 4% year-on-year in December, which was slower than expected. At every sign that China is in trouble investors run from emerging economies—it is one national economy that serves as both a proxy for Western appetite for exports and as a source of demand in its own right, particularly for commodities.

To my mind the doom-mongers are too pessimistic. Something other than a generalised rout is taking place. As we have argued before, most emerging economies have more flexible exchange rate policies now than they did in the 1990s—falling currencies can be a healthy sign of adjustment, provided the decline is orderly. And this sell-off has been discriminating. India, which was clobbered last summer, has done all right. It has a new central-bank boss in place and has narrowed its current-account deficit, largely by banning gold imports. Mexico and South Korea are perceived to have reforming governments and they too continue to command investors’ confidence. The Philippines, long dismissed by investors as a land of eternal promise and guaranteed disappointment, managed to issue ten-year sovereign bonds with an interest rate of just 4% earlier this month—again, its government is judged to have a reformist bent.

This latest panic is partly about politics. Look at the list of worst-hit countries. Turkey’s currency has collapsed due to a corruption scandal that has engulfed its prime minister. Venezuela, which also devalued last week, is a wreck. South Africa is facing a wave of industrial unrest. Ukraine is being racked by huge protests. The Thai baht has so far held up surprisingly well—but our correspondent believes the country’s very unity is now at stake.

What might cause the panic to spread from these troubled spots to all the emerging economies? Perhaps if more countries faced either social instability or a sense of political impasse, making tough reforms harder. This is not impossible—India and Indonesia face elections this year which could rouse passions or result in weak governments. Brazil faced widespread unrest last year.

A second trigger might be a sense that the emerging economies are fibbing about the state of their financial systems. The 1997 crisis spiralled when it emerged that many private banks were in dreadful shape and that some monetary authorities had become captives of the private sector. The central banks of Thailand and South Korea misled the outside world, respectively, about their reserves position and their country’s dollar liabilities.

One common characteristic of all emerging countries today is that they have all shared in the colossal credit boom. Loans have been growing by double-digit rates for many years. Vietnam has already blown up—it has set up a “bad bank” to try and clean up its lenders. Perhaps more countries are yet to own up to big, bad debt problems of their own. If you want to give yourself a fright on this front consider the share price of Standard Chartered, a Western bank largely exposed to the emerging world. It has collapsed.

So there are two things to watch for signs that the present panic might morph into something much nastier. First the streets—for more social unrest and political gridlock. And then the banks—for any sign that their books are rotten.

(Picture credit: AFP)