Shoe V Arning

It’s no wonder we’re obsessed with shoes these days. Even the V-people, as I’ll call them, keep one wary eye glued looking behind them. Survivor’s euphoria means a lot of potentially bad things, only beginning with a false sense of survivor-hood. We’ve so far made through only one big test, there are likely more to follow.

And if they do, when they do, the system greets them with a significantly weakened foundation. A lot of times confronted with major upheaval the push back from it uses up all the ammo; or the entire toolkit, depending upon your preferred metaphor.

This is something that the IMF, of all places, since they’d know about repeated problems, continues to warn about in ongoing, recurrent commentary. Not merely the usual hedging on a shaky “V”, truly trying to get people’s attention ahead of time. Was GFC2 that much of a disruption that it actually got the IMF to think ahead rationally for once?

It sure seems that way now.

Emerging market economies have navigated the first phase of the crisis relatively well, but the next phase could be much more challenging. The virus remains present, financial conditions are still fragile, and policy space is lower, particularly for those countries facing high risks to debt sustainability. The latter group of countries is quite large. Approximately one third of all emerging market economies entered the crisis with high-debt levels and are assessed to have no space for undertaking additional discretionary fiscal policy, or as having that space significantly at risk. [emphasis added]

These unfortunate EM’s sapped of their strength by the last more than half decade of dollar subsistence then had to expend all their bullets just trying to get to this point. And that’s a problem because just two days ago the IMF had warned in a separate communication about:

The world entered the COVID-19 pandemic with persistent, pre-existing external imbalances. The crisis has caused a sharp reduction in trade and significant movements in exchange rates but limited reduction in global current account deficits and surpluses. The outlook remains highly uncertain as the risks of new waves of contagion, capital flow reversals, and a further decline in global trade still loom large on the horizon. [emphasis added]

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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