Thus began a minicrisis in emerging-market debt. Iceland’s currency went into free fall, plummeting 10 percent almost overnight, and speculators who had borrowed in lower-yielding currencies to invest in the higher-yielding Icelandic krona-denominated debt (a technique called a "carry trade") were left struggling to unwind their positions in an increasingly illiquid market. As they sought to sell more-liquid currencies to raise cash, it caused other emerging-market paper, such as the Brazilian real and South African rand, to suffer.

By March, people started to wonder if the Icelandic angst was a portent of things to come in other emerging markets. But the consensus view among professional emerging-market investors is that it is not. "This is a country that has high interest rates for a reason, and that is that it has very poor economic fundamentals, which is not the case with the vast majority of emerging markets," says Aberdeen Asset Management’s Edwin Gutierrez. "The vast majority of emerging markets are running current account surpluses and run a tight fiscal ship."

Indeed, the fact that the Iceland sell off only slightly affected emerging-markets currencies could be a good sign for investors. "Years ago that situation would have affected the entire asset class, but now I think investors have become more sophisticated and there’s more money in the asset class, so those situations tend to be isolated," says Jim Barrineau of AllianceBernstein.

Art by Stephen Webster.

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