Market: Will the sovereign debt crisis come with rising rates?

Market: Will the sovereign debt crisis come with rising rates?

(BFM Bourse) – In support of subprime and Covid-19 crises, states have resorted heavily to debt. However, central banks are beginning to raise their key rates to ease inflationary pressures. The most fragile countries on the planet are at the forefront of higher borrowing costs and the potential risk of default is in sight.

Debt, which is a necessary weapon in the fight against crises, has reached alarming levels around the world as interest rates rise, which has led Davos to think about the risks of future “debt crises.”

Public debt in developed countries is approaching 120% of GDP, the International Monetary Fund (IMF) Gita Gopinath assessed during a round table on Wednesday. And it has “increased significantly” between developing and emerging countries.

She warned that more than half of low-income countries were already “burdened” or at high risk of joining it. “We could certainly see an intensification of these emergencies,” the former chief economist of the institution continued, but has so far ruled out a global “debt crisis” scenario a month and a half after Sri Lanka’s bankruptcy.

Expansion of public debt with “subprime” and Covid-19

Public debt has widened in particular with the last two major global crises: the 2007-2008 financial subprime, then the Covid-19 health, which has forced governments around the world to collect a checkbook since 2020. Concerns about how to manage them now prevail.

“It’s a bigger economic problem for the future than almost anything we’ve been talking about,” US billionaire David Rubenstein, founder of Carlyle Investment Fund, told Davos during a risk roundtable. recession, soaring food prices and extremely tight supply chains.

Especially because it’s not just state debt: according to the Washington-based Institute of International Finance (IIF), public and private debt of companies and households peaked at a record $ 305 trillion in the first quarter.

“Debt now costs something”

After years of interest rates at the lowest level, central banks have begun to raise rates to meet inflation. This increases the borrowing costs of states that continue to spend a lot to support their economies as well as companies.

“Debt costs something now,” Banque de France Governor François Villeroy de Galhau said in Davos on Monday, while until recently it cost almost nothing. “It’s a radical change,” the governor continued. For France alone, he calculated that each increase in the ten-year borrowing rate by one percentage point represented an additional invoice of € 40 billion during this period.

After the eurozone debt crisis at the turn of 2010, the continent is closely monitored by the IMF, which fears that a potential acceleration in inflation could lead to a sharp rise in interest rates, said Gita Gopinath. Emerging countries, traditionally very weakened by rising interest rates, especially from the United States, seem less vulnerable this time, with many experts pointing to less foreign currency debt in those countries than in the past, and reserves are changing more.

On the other hand, the risks of default are much greater for the most fragile countries, said Patrick Khulekani, director of the Bank of South Africa, on Wednesday in Davos. “We are very worried that this will happen,” he said, stressing the extent of household and business debt and the price of food, which is “causing ruin.”

In an effort to help the most vulnerable countries, the international community has been trying for months to mobilize “special drawing rights”, a kind of currency created by the IMF, to ease part of their burden while offering to suspend their debt. Payments.

Sabrina Sadgui with AFP

© 2022 BFM Bourse

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