medium · FRM Part 2 Current Issues
An emerging market sovereign has reserves of 50 bn and short-term external debt of 42 bn. The current account deficit is 10 bn.
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 equals 119%, exceeding the benchmark.
- Yes, because any current account deficit at all implies systemic sovereign fragility.
- No, because the sovereign can simply print its own domestic currency to settle any external debt owed.
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