The consequences sharp capital flow reversals that are now hitting all risky emerging market assets have not been pretty.

But the demand for emerging market assets is neither infinite nor perfectly substitutable for the assets of advanced economies even for given interest rate differentials because these assets have very different liquidity and credit risks.

The performance of emerging market currencies and other assets so far in the second quarter suggests that deleveraging has begun once again.

Emerging Market Resilience

Emerging Market Target Practice

The Emerging Market Currency Rout

The Great Emerging Market Bubble

Trouble in Emerging Market Paradise

The Emerging Market Growth Engine

Indeed, emerging market economies should reduce their accumulation of foreign assets rather than hope to weather the political backlash against SWF s in the US and EU.

The Coming Emerging Market Debt Squeeze

Likewise, India s public finances are stronger than they are in most emerging market countries, let alone emerging market countries in crisis.

Emerging market crises do hold important lessons.

Emerging market countries face an additional problem.

The End of the Emerging Market Party

Beban Utang Tersembunyi pada Negara negara Emerging Market

Emerging market demand has pushed up commodity prices.

Similar lessons are relevant in emerging market economies.

Emerging market countries could also invest in euros, if only they were offered such liquid assets as US Treasury bonds therein lies the current debate over the proposed creation of eurobonds.

Since then, most emerging market currencies have rebounded sharply.

Emerging market interest rate spreads now are abnormally low.

Compared to 2007 and 2008, foreign investors holdings in emerging markets are much higher, owing to these countries relative economic strength in recent years and rock bottom returns on developed market financial assets.

If the market wants more safe, high quality, liquid financial assets, give the market what it wants.

Indeed, the number of excellent emerging market candidates is remarkable.

Personally, I would urge emerging market countries to support Shanmugaratnam.

The emerging market economies are at risk as a result.

Traditionally, sovereign risk has been concentrated in emerging market economies.

But the gross flow of capital is from emerging market to emerging market, through big banks now implicitly backed by the state in both the US and Europe.

To be sure, political and market volatility in a broad range of emerging market economies will continue.

I suspect that emerging market policymakers hearts are advocating the former.

Emerging market central banks diversified out of dollars and into gold.

Many of the emerging market countries, for example, are still underrepresented.

The argument for this option is that long term secular factors are important drivers of capital inflows, as advanced economy investors discover that they are underweight in emerging market assets and reduce their portfolios home bias.

HONG KONG When the US investment bank Lehman Brothers collapsed five years ago, emerging market economies did not hold many of the toxic financial assets mainly American subprime mortgages that fueled the subsequent global financial crisis.

These proportions will rise even higher as emerging market countries urbanize rapidly.

Already, world class American and emerging market companies are investing in Liberia.

Less advanced and emerging market economies in Europe are facing major challenges.

This means that at some point large scale, persistent sterilized foreign exchange intervention amounting to several percentage points of GDP would satisfy the additional demand for emerging market assets and stop the inflows, even if interest rate differentials remain.

Every other emerging market, even in Asia, has eventually had to cross this bridge.

Emerging evidence suggests that this may well be the case in the stock market.

By contrast, the crises were a wake up call in many emerging market countries.

A second cause lies in the fact that fixed income assets such as government, corporate, and emerging market bonds are not traded in more liquid exchanges, as stocks are. Instead, they are traded mostly over the counter in illiquid markets.

In particular, OFDI has helped enterprises increase their revenues, assets, profitability, market reach and exports.

This signals a remarkable shift in relative demand for high quality and liquid financial assets an extraordinary rise in market wide excess demand for such assets.

This explains the underperformance of commodities and emerging market equities even before the recent turmoil.