Fed inaction gives emerging economies breathing space After whispers of a brewing financial crisis, emerging markets greeted news that the US Federal Reserve would not start tapering its asset purchase programme with an overwhelming wave of euphoria. Equities, bonds and currencies rallied sharply on Thursday. Mehmet Simsek, Turkey's finance minister, described the Fed's decision as "maintaining the status quo" in a tweet, adding it was "good news for emerging markets." Turkish stocks rallied more than 7 per cent, helping push the FTSE Emerging Markets index to its highest since the end of May. Borrowing costs fell further on Thursday as bonds extended their rally after the biggest one-day gain in almost three months on Wednesday. Developing countries rushed to take advantage of the boost, announcing a flurry of bond deals as even bearish analysts threw in the towel and advised clients to embrace the euphoria. "From now on, we believe that a multi-week rally can develop in the period ahead, across all asset classes," Benoit Anne of Société Générale said in a note. Nonetheless, while the immediate dangers posed by the anticipated withdrawal of the Fed punchbowl have abated, analysts and money managers stressed that the failure to begin tapering this month merely provides breathing space to tackle underlying economic problems. "What I think that the tapering - or non-tapering - decision does is essentially lengthen that window of opportunity where policy makers can apply the structural reforms to reassure investors for the long term," says says Fred Neumann, chief Asia economist at HSBC. So it buys us time, but it does not solve anything fundamentally. Several asset managers echoed this cautious note. Dominic Ross, chief investment officer for equities at Fidelity argued developed markets should benefit more than emerging ones. "Structural issues remain in the latter that show no signs of going away," he says. Many emerging economies have suffered large outflows of capital since late May, when the prospect of Fed tapering first emerged. Downward pressure on currencies, most notably the Indian rupee, the Indonesian rupiah and the Turkish lira, raised concerns that some countries dependent on overseas capital to fund persistent deficits could even face a balance of payments crisis. Elsewhere, worries have focused on a rapid increase in consumer credit. Take Thailand and Malaysia, where household debt has risen to around 80 per cent of gross domestic product, from between 55-65 per cent in 2008. Some analysts fear that higher borrowing costs caused by tighter global monetary conditions would prompt a surge in bad loans. We're on the wrong path. To get off that path we need to stop relying on excessive credit growth," says Duncan Wooldridge, chief Asia economist at UBS. We've got respite on the tapering story, but the cat is out of the bag for some of those countries with liquidity risk. Still, the Fed's decision at least allows embattled policymakers in emerging economies some more time to push through reforms to prepare for the eventual tightening of US monetary policy. The brief reprieve may be most welcome in India, where the new central bank governor Raghuram Rajan must contemplate a delicate first interest rate decision on Friday. Mr Rajan is not expected to cut rates, but is now likely to face calls to reverse some of the steps taken by the Reserve Bank of India to drain liquidity in recent months, as part of a series of measures to bolster the currency. The rupee rose 2.6 per cent by later afternoon in London. India has got a get-out-of-jail-free card from the Fed. The question now is whether and how they will use that card," says Sanjeev Prasad, head of research at brokerage Kotak Institutional Equities. Even after factoring in Thursday's spikes, both the Indian and Indonesian currencies have lost more than 11 per cent against the US dollar since May, while both central banks have spent billions of dollars on propping up the currencies, rapidly eroding their foreign exchange reserves. Brazil has bolstered the real by unveiling a $60bn intervention programme, but fund managers remain concerned over the country's deteriorating fundamentals. And the Fed's largesse will not last forever. Barclays now forecasts a $15bn reduction in asset purchases by the US central bank in December, while Société Générale analysts say the move could be twice as large. ""This rally is just far too much," argues Michael Riddell, a bond fund manager at M&G Investments. The market has gone from expecting rate hikes to pricing in quantitative easing forever. But fundamentally nothing has changed. Additional reporting by Robin Wigglesworth