The Eagle against the PICTS

When I travelled to England to watch my beloved Be?ikta? against Liverpool, I drove as far north as Hadrian?s Wall, which was built by the Romans in the second century as a defensive fortification. Another eagle is again on a collision course with Picts nearly two millennia later.

As the Fed?s first rate hike in almost a decade approaches, financial markets remain uncomfortably numb: The VIX index, a measure of the implied volatility of U.S. stock options often touted as the markets? fear gauge, is at historically low levels. Many believe that the Fed rate hike has already been priced in and therefore will be a non-event.

This may be the calm before the storm. As economists from French bank BNP Paribas underline in a recent research note, ?academic research consistently finds that sharp spikes in the VIX are the biggest single driver of emerging market (EM) financial stress.? They therefore try to figure out which EMs would be most vulnerable to such a surge in volatility following the Fed?s hike.

In doing so, rather than looking vulnerability indicators in an absolute sense, they rank sixteen EMs according to ?ten key indicators encompassing macro momentum, policy space, external liquidity and solvency.? This methodology makes sense when you consider that markets are like a beauty contest.

The ugliest turns out to be Colombia, whose current account balance has deteriorated significantly because of lower oil prices, followed by two members of the original ?fragile five?: Turkey and Indonesia. The other vulnerable countries turn out to be South Africa and Peru, forming the new fragile five as ?PICTS.?

For Turkey, BNP Paribas economists note that ?despite a more than 3 percent of GDP improvement in its current account...