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India’s Turn to Save the World from the Next Crisis
A silent wave of financial stress is running through the world financial markets. India, the incoming G20 President, must provide the leadership necessary to save the world from an emerging market debt crisis. The proximate cause of the crisis is the combination of COVID-19 debt and a jump in the US dollar. Fighting the dollar’s appreciation with higher interest rates on debt will push the world into recession. Faced with a rich-country commercial bank debt crisis in 2008, the G7 announced that they would use all the available tools and take all necessary steps to save the banks. We need to do the same today for countries. India should press the IMF to immediately increase access to its unconditional rapid fi nancing facilities and temporarily suspend interest rate surcharges. Avinash
It may not be evident from the steady 10% slip in the rupee versus the dollar and a 2% rise in Indian government bond markets over the past year, but a silent wave of financial stress is running through the world financial markets.
The yield on long-term sovereign debt is a good measure of sovereign stress. One will not be surprised that a price cannot be easily found for the Sri Lankan, Ukrainian, El Salvadoran, Venezuelan, and Argentinian debt. Still, in Tunisia and Zambia, where one can, yields are over 25%, according to Trading Economics. Yields in Brazil, Colombia, Ethiopia, Ghana, Kenya, Nigeria, Pakistan, and Turkey—big economies—have all climbed to around 13%. Anything in double digits will likely prove unsustainable. India’s long-term debt yields are up significantly too but still safely below double digits. According to credit default swaps prices on Bloomberg, the market expectation of debt restructuring or defaults has risen substantially in over 30 countries. In the last five months, foreign investors have pulled $38 billion out from emerging market stocks and bonds in the longest streak of withdrawals on record, according to the J P Morgan data reported by the Financial Times.
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