Foreign Policy devotes part of its January-February issue to a symposium of five pessimists dubbed prophetic by the journal. A sample from the now-ubituous Nouriel Roubini:

The prevailing conventional wisdom holds that prices of many risky financial assets have fallen so much that we are at the bottom. Although it’s true that these assets have fallen sharply from their peaks of late 2007, they will likely fall further still. In the next few months, the macroeconomic news in the United States and around the world will be much worse than most expect. Corporate earnings reports will shock any equity analysts who are still deluding themselves that the economic contraction will be mild and short.

Severe vulnerabilities remain in financial markets: a credit crunch that will get worse before it gets any better; deleveraging that continues as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, thus leading to cascading falls in asset prices, margin calls, and further deleveraging; other financial institutions going bust; a few emerging-market economies entering a full-blown financial crisis, and some at risk of defaulting on their sovereign debt.

Roubini is entirely correct to focus on sovereign issues, to which I called attention in this and other recent posts. In another contribution, though, consultant David Smick offers a dubious scare story about emerging market trade credits. He writes,

Europe’s exposure to risky, emerging-market trade debt turns out to be six times its exposure to U.S. subprime mortgages. In some economies, including Britain’s, banks’ exposure dwarfs the national GDP.

Here’s why this is a huge problem: Developing economies allowed themselves to become dangerously export dependent, while tying their currencies to the U.S. dollar and building mountains of excess savings. That growth model is crumbling fast as global demand is plummeting. But if too many of these emerging markets go down, the IMF lacks the necessary resources to mount rescue operations. To put things in perspective, Austrian banks have emerging-market financial exposure exceeding $290 billion. Austria’s GDP is only $370 billion.

Austria lends overwhelmingly into Eastern Europe and the former Soviet Union, with a strong emphasis on the Czech Republic, Poland, Hungary and Slovakia. The likelihood of defaults among these countries is small given their close integration with the European and especially the German economy, as well as Russia’s continued financial strength. Southern Europe’s position, as I explained elsewhere, is far more troubling. I would prefer exposure to Hungary over Greece any day of the week.

Quibbling aside, it is encourgaging that the foreign policy establishment has begun to worry about the sort of issues I raised in November, when I pointed out that the size of the prospective US Treasury deficit would suck world markets dry of capital and create serious instability among sovereign borrowers with significant external borrowing requirements.

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