EDITOR'S NOTE: As the central banks of all major economies tighten monetary policy to combat rising costs, a large majority of developing countries are experiencing high levels of multi-decade debt burden and distress. The World Bank is warning that this development may trigger a financial crisis in the “emerging” segment of the global economy, deepening poverty and setting off global instability. In the US, the big debate playing out on Wall Street is whether we’re going to see a gradual slowdown (aka “soft landing”) or a sharp recession. The market response to the FOMC decision today, GDP numbers tomorrow, and PCE inflation data on Friday will help give us a clue with regard to the direction we’re heading. Still, we have to keep in mind the global economic picture which is, in a way, inextricably linked to our own domestic economic prospects.
(Bloomberg) -- A lack of progress by the world’s largest economies to reduce the debt burden of the poorest nations as borrowing costs increase will cause worsening poverty rates and instability, World Bank Group President David Malpass said.
Most Read from Bloomberg
“Debt relief is of major importance for the world because the interest rates are going up,” Malpass said in an interview on Bloomberg Television on Tuesday. “The debt was already too burdensome and now the countries are experiencing currency depreciation, which causes inflation.”
Surging prices have forced central banks worldwide to tighten monetary policy, led by the Federal Reserve’s pivot to aggressively lifting rates, which has supercharged the dollar. Meanwhile, developing nations have amassed a quarter-trillion dollar pile of distressed debt that threatens to create a historic cascade of defaults.
The worsening debt burden comes after the expiration in December of the so-called Common Framework adopted by the Group of 20 to suspend or revamp debt repayments by low-income countries during the Covid-19 pandemic.
“There’s not really a process to reduce that debt. We saw that at the G-20 just completed last week -- no forward progress,” he said, referring to the group’s meeting last week in Bali, Indonesia.
With emerging and developing economies’ debt at multi-decade highs, the increase in global borrowing costs and exchange-rate depreciations “may trigger financial crises, as was the case in the early 1980s,” the World Bank said in the June edition of its Global Economic Prospects report.
About 60% of the world’s 75 poorest countries are in or at risk of debt distress, and this is spreading to middle-income countries, Malpass said at the time.