Market: With interest rates rising, will the next sovereign debt crisis come?

(BFM Bourse) – To support economies burdened by the “subprime” crises and Covid-19, countries have turned largely to debt. But central banks have begun to raise their key rates in order to curb inflationary pressures. The most fragile countries on the planet are at the forefront of rising borrowing costs, with potential risks of default looming.

A necessary weapon to fight crises, debt has reached alarming levels around the world as interest rates rise, prompting Davos to question the dangers of future “debt crises”.

Public debt is approaching 120% of GDP in developed countries, estimated Wednesday No. 2 by the International Monetary Fund (IMF) Gita Gopinath during a roundtable on the subject. It has “significantly increased” among emerging and developing countries.

And she warned that more than half of low-income countries are already in “distress” or at high risk of becoming so. “We can certainly see these malaise intensify,” the institution’s former chief economist continued, but for now he ruled out the scenario of a “debt crisis” on a global scale, a month and a half after Sri Lanka defaulted.

Public debt widens with ‘mortgage’ and Covid-19

Public debt has widened in particular with the last two major global crises: the finances of 2007-2008 with “mortgages,” and then health with Covid-19 that forced governments to take out the checkbook everywhere in the world as of 2020. Now dominates concern over how to manage it.

“It’s a bigger economic problem for the future than almost anything we’ve talked about,” US billionaire David Rubinstein, founder of the Carlyle investment fund, told Davos during a roundtable discussing the risks. Recession, food price hikes, and overstretched supply chains.

Especially since there is not only state debt: According to the Washington-based Institute of International Finance (IIF), public and private debt, businesses and households peaked in the first quarter at a record $305 trillion.

Debt has a cost now.

Above all, after years of very low interest rates, central banks have started raising interest rates to counter inflation. This increases borrowing costs for countries that continue to spend a lot to support their economies as well as businesses.

“Debt has a cost now,” Bank of France Governor Francois Villeroy de Gallo said Monday in Davos, while borrowing has cost virtually nothing until very recently. “It’s a radical change,” the governor continued. For France alone, he calculated that every one percentage point increase in the borrowing rate for ten years represented an additional €40 billion bill over this period.

After the eurozone debt crisis in the early 2000s, the International Monetary Fund is keeping a close eye on the continent, Gopinath said, fearing that a possible acceleration in inflation could lead to a sharp rise in interest rates. Traditionally, they have been severely weakened by higher interest rates, especially from the United States, emerging countries look less threatening this time, with many experts pointing to less foreign currency debt in these countries than in the past and more reserves change.

On the other hand, Director of the South African Development Bank, Patrick Khalikani, said in Davos that for the most fragile countries, on the other hand, the risk of default is much greater. “We are very concerned that this is going to happen,” he said, also referring to the scale of household and corporate debt, and food prices that are “wreaking havoc.”

In an effort to help the most fragile countries, the international community has been trying for months to mobilize the “Special Drawing Rights”, a type of currency created by the International Monetary Fund, in order to relieve part of their burdens, while offering to suspend their debts. payments.

Sabrina Sadeghi from Agence France-Presse

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