Although the global outlook is more reassuring than it was a few months ago, uncertainty about the shape and pace of global recovery persists. While macroeconomic risks have decreased, vulnerabilities remain. There is growing concern about the deterioration in the sovereign risk profile and dangers posed to financial stability in some countries.
It is often said that every financial crisis is followed by a sovereign debt crisis because of the public sector’s support to affected parts of the economy. Will this time be different? Recent developments have shown the merits of a gradualist approach to allowing external financing of fiscal deficits.