The wave of covid-19 stimulus is putting emerging markets in a bind: Emerging markets may be lining themselves up for a fresh fiscal crisis caused by the very stimulus measures that prevented a financial meltdown earlier this year, Sydney Maki writes for Bloomberg. Governments and central banks in the emerging world ramped up spending and slashed interest rates as the pandemic intensified, and lockdown measures crippled consumer demand and stifled investment.

A catch-22: Having ridden out the worst of the initial economic storm, markets are now likely to hone in on the troubling levels of debt accumulated during the crisis. Debt-to-GDP levels in emerging markets rose to a record 230% during 1Q2020, and around USD 3.7 tn of debt is due for repayment this year, according to the Institute for International Finance. If limp growth rates persist in the coming months, countries may be forced into more spending, intensifying scrutiny on public finances. Yet, responding to these concerns by cutting back on spending and raising interest rates risks killing off a potential recovery and inviting a protracted recession.

And of course the threat of the virus remains ever-present: A resurgence of the virus in emerging markets will increase the likelihood of a fresh emerging-market debt crisis, the IMF said on Tuesday. Countries with large current account deficits, high levels of foreign currency debt or dwindling foreign reserves may be forced into default if a renewed outbreak sparks further unrest in the markets, the fund said.

And this time a weak USD is unlikely to help them: Emerging markets are unlikely to benefit from the weakening USD as they have in the past due to heightened levels of risk, analysts tell Reuters. In normal times a falling USD tends to translate into higher inflows into emerging markets as investors seek higher rates of return. But although the USD suffered its worst month in a decade in July, bondholders continued to plough more money into US and European junk-rated assets than they did into emerging markets amid concerns over debt sustainability and low levels of liquidity.