'Circle of Pain' Snags Emerging Markets, Too

Only a few weeks ago, it seemed the main fronts of the financial crisis were the Western banking system and mortgage market. But now the crisis has spread to emerging markets like Russia and Brazil. As Paul Krugman writes in the New York Times, the mantra of “decoupling”—that emerging economies could operate independent of the West—turns out to be a fiction.

In Russia, for example, the government was amassing a stable portfolio of foreign exchange—but risk-oblivious corporations and banks ran up huge debts denominated in dollars or euros. Now the bills are due, institutions worldwide are failing, and the turmoil in the global system only makes things worse. “Bad news begets bad news,” Krugman says, “and the circle of pain just keeps getting wider.”