Time for the Tax Experts

A new report from Citigroup Global Markets (subscription required) titled Out of the Frying Pan? Fiscal Vulnerability Takes Centre Stage argues that the global financial crisis has moved into its third stage. First there was a financial vulnerability phase, in which countries with high loan/deposit ratios suffered, and this was followed by (and overlapped with) an external vulnerability phase. In this second phase, countries with high external financing needs suffered the most. Fortunately, they have been buoyed by a combination of an increased supply of finance - in large part through a ramped up IMF - and a decline in demand for external finance through improved current account balances.

The third stage of fiscal vulnerability will fall heaviest on those countries that have high debt/GDP ratios. As Citi puts its:

It seems likely that external stability has been purchased partly at the price of greater instability in public sector finances. The story set out above suggests that one of the main mechanisms by which emerging economies have reduced external vulnerability is through a fall in domestic spending and, hence, import compression. That decline in growth, in turn, points to risks on the fiscal side, and this can be thought of as the third phase of the crisis: the Fiscal Vulnerability Phase. If very weak growth increases the supply of domestic bonds to finance larger deficits, is there a risk that investor confidence could be undermined, with negative consequences for currencies and risk premia?

So what does all of this mean for the work of the international financial institutions? It's time to bring on the tax experts!