Reasons for the Crisis: Message 4/10

iv) The impact on developing countries will be slow but harsh.  

Contagion is happening through four main channels:  export demand; remittances; commodity prices; and financing flows.  But most emerging markets will be spared the symptoms of past crises----huge devaluations, interest rate increases, inflationary spikes, banking collapses, debt defaults.  Instead, the initial impact will come through an interruption of foreign bank finance to the domestic private corporate sector. This will slow down trade and delay investment projects.  The early data shows that already.  This will be followed by increasing difficulties in rolling over government debts in 2010 (the next iceberg).  The availability of external funding will be further impaired by the crowding-out effect of heavy borrowing by rich countries to pay for their stimulus programs.   So, less exports, less investment and less fiscal space will bring growth to a halt among developing economies, and may complicate the solvency of those that do not have deep domestic financial markets.