Over the past few days, many investors have asked why, with its currency in freefall again as its reserves evaporate, did Turkey take the drastic measure of sending its overnight swap rate above 1,000% in a clear attempt to crush the shorts. The answer may be simpler than most expect: if Turkey doesn't prevent the panic from escalating, there may be nobody who can help it.
That was the implied message delivered today by the head of the Bank for International Settlements, Agustin Carstens, who said that International Monetary Fund does not have sufficient lending capacity to respond, if a major new emerging market crisis affecting several countries suddenly erupted.
Carstens, the former corpulent head of the Bank of Mexico, said that last reviews of IMF quotas, how much member countries pay in and the voting rights that go with that, had failed to ensure it had sufficient financial resources. Which, of course, leaves the question open: if the IMF no longer has the resources to rescue emerging markets and China's economy is now contracting, who does?
"This leaves us with the problem of having inadequate resources and having to improvise in times of crisis. The mission of the fund is there," Carstens told a conference at the French central bank. “If the Fund cannot do it others will have to do it otherwise the economic costs will be huge,” he added clearly hoping to pass the multi-trillion responsibility of bailing out EMs to someone a little more liquid.
But it's not just emerging market that are woefully unprepared for the next crisis, and will suffer significantly should a "fat tail" event emerge: it turns out that Europe is in the same boat.
While the eurozone is in better financial shape than a decade ago, it is not solid enough to withstand another economic crisis, the head of the IMF, Christine Lagarde, said on Thursday. In a surprising moment of honesty from the Hermes-bag afficionado, Lagarde told a Paris conference that the currency union "is not resilient enough" to emerge unscathed from "unexpected economic storms".
Lagarde acknowledged that the currency union was now "more resilient than a decade ago when the global financial crisis struck, "but it is not resilient enough," she admitted.
"Its banking system is safer, but not safe enough. Its economic well-being is greater overall, but the benefits of growth are not shared enough," Lagarde told the same gathering organized by the French central bank where Carstens spoke earlier.
It was unclear what the consequences are if as the IMF head claims, the eurozone will be crushed during the next crisis.
Lagarde's warning comes as signs of slower economic growth across Europe are becoming increasingly more obvious, especially in the two core economies of Germany and France. On Friday, manufacturers in the 19-nation single currency bloc "reported their steepest downturn for six years" as pressure mounted from trade wars and Brexit fears, IHS Markit said.
On Wednesday, the European Central Bank added to growth worries when its chief Mario Draghi hinted that interest rates would stay low for longer than previously anticipated, to stimulate growth and inflation.
And with central banks now leery of injecting further liquidity via QE, while ZIRP and NIRP no longer suffice to boost economies, it remains unclear just who will provide a lifeline to either Europe or the EM when the next recession and/or global financial crisis strikes, some time over the next 12-18 months.