medium · Frm Part 2 Current Issues
An emerging market sovereign has reserves of 50bn and short-term external debt of 42bn. The current account deficit is 10bn.
According to a strict reading of the Guidotti-Greenspan rule and its modern flow-adjusted variations, is the sovereign vulnerable?
- Yes, because reserves are less than the sum of short-term debt and the current account deficit
- No, because reserve coverage of short-term debt is 119%, exceeding the 100% benchmark
- Yes, because any current account deficit at all implies systemic sovereign fragility
- No, because the sovereign can print domestic currency to settle its external obligations
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