Skip to main content

rogoff167_Photo by Drew Angere_Getty Images Photo by Drew Angerer/Getty Images

Are Emerging Markets the Canary in the Financial Coal Mine?

Economists who assure us that advanced-economy debt is completely “safe” sound eerily like those who touted the “Great Moderation” – the supposedly permanent reduction in cyclical volatility – a generation ago. In many cases, they are the same people.

BUENOS AIRES – Are brewing exchange-rate and debt crises in Argentina and Turkey localized events without broader implications? Or are they early warning signs of deeper fragilities in bloated global debt markets that are being exposed as the US Federal Reserve continues to normalize interest rates?

Rising interest rates could test stability in some advanced economies as well, especially in Italy, where voters, particularly in the less developed south, have opted decisively for a disruptive populist government. With an economy ten times the size of Greece, a default in Italy would blow up the eurozone. Indeed, the populist coalition government that has now taken power has hinted that it wants write-offs for some of its under-the-table debts (not included in Italy’s official public debt of over 130% of GDP) to the euro system through the European Central Bank.

The good news is that a full-blown global debt crisis is still relatively unlikely to erupt. Even with a recent softening of European performance, the overall global economic picture remains strong, with most regions of the world still growing briskly. Although it is true that several emerging-market firms have piled up worrisome quantities of dollar-denominated external debt, many foreign central banks are brimming with dollar assets, especially in Asia.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

https://prosyn.org/pUZVv7h;

Handpicked to read next

Brokers clink glasses Daniel Roland/Getty Images

Today’s Rational Exuberance

Anatole Kaletsky

What many analysts still see as a temporary bubble, pumped up by artificial and unsustainable monetary stimulus, is maturing into a structural expansion of economic activity, profits, and employment that probably has many more years to run. There are at least four reasons for such optimism.

SEE ALSO:

Why Financial Markets Underestimate Risk

The Coming Bear Market?

Whistling Past the Geopolitical Graveyard

  1. bildt69_DELIL SOULEIMANAFP via Getty Images_syriansoldiermissilegun Delil Souleiman/AFP/Getty Images

    Time to Bite the Bullet in Syria

    Carl Bildt

    US President Donald Trump's impulsive decision to pull American troops out of northern Syria and allow Turkey to launch a military campaign against the Kurds there has proved utterly disastrous. But a crisis was already inevitable, given the realities on the ground and the absence of a coherent US or Western policy in Syria.

    8

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions