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Fiscal stimulus for debt-intolerant countries

Emerging markets on the eve of the sub-prime shock

Fortunately for most emerging markets, this synchronous export and financing shock from the North came once they had built vast war chests of international reserves through the “bonanza” years (Figure 1). Emerging market reserve managers learned the lesson of the Asian Crisis – when times get tough, the advanced economies look inward, so emerging markets’ first type of defence should be their own resources. In the fat years, commodity prices were booming, growth in the North was buoyant, international interest levels were low and stable, and international capital was plentiful. In this environment, fiscal positions in lots of emerging markets improved markedly. Public debt levels were stabilised as well as reduced, and several countries substituted public external debt with domestic debt and lengthened the maturities of their outstanding debt.