The era of cheap money made many of the poorest countries more vulnerable to this situation. When rates were low, emerging market economies ramped up their borrowing, issuing more dollar-denominated debt. This debt is serviced with their foreign exchange earnings. Now, they find themselves in a situation in which those earnings are dwindling and in which the Federal Reserve is tightening monetary policy. And when interest rates go up, so too do debt-servicing costs.

The extent to which higher interest rates increase the repayment burden of vulnerable economies depends on the structure of their debt. Unfortunately, in addition to owing a lot of private lenders, the share of developing countries’ debt that is variable — that is to say exposed to increases in interest rates — has risen sharply, to over 30 percent since the Global Financial Crisis. As a result, debt distress has increased throughout the developing world, and the stock of debt has soared to 250 percent of government revenues, a fifty-year high.

The Fed’s rate hikes and the “tapering” off of its quantitative easing program has had another, even more consequential effect: a stronger dollar. A weaker local currency relative to the dollar raises a country’s import bill and worsens the problems of rising prices. But an appreciation of the dollar not only makes the relative foreign-exchange positions of emerging markets more precarious — since the currency they need to bolster their reserves and service their debt now comes at a greater price — but also instantly stifles credit and investment growth. This is due to the effects of a stronger dollar and a depreciating local currency affecting bank balance sheets: as the dollar appreciates and the cost of servicing dollar debt rises as a result, the value of those liabilities in the domestic currency expands relative to a bank’s assets. On the basis of this asset-liability mismatch, the banking system will extend less credit to firms and individuals to finance investment and consumption.

These tighter financial conditions domestically add to the unemployment already created by general economic conditions: the flight of foreign capital, the collapse in exports, and the reduction in public spending. A terrible, self-reinforcing spiral is setting in for many countries, with monetary tightening and runs on their currencies leading to higher debt-servicing costs, forcing them to draw down their reserves, depressing investor confidence further, and precipitating further sell-offs and further currency depreciations.

In the coming months, it is not unlikely that we might witness a transition from balance-of-payments crises to debt crises, and from these economic events could emerge global social unrest and, in the worst cases, famine — all while stocks of the three agricultural staples — rice, wheat, and maize — are apparently at historic highs.

“If you think we’ve got hell on earth now, you just get ready,” United Nations World Food Program director David Beasley warned in late March. Meanwhile, a World Bank study estimated that “for each one percentage point increase in food prices, 10 million people are thrown into extreme poverty worldwide.”

The first major casualty of the debt crisis was Sri Lanka. Subject to economic mismanagement for years and badly hit by the pandemic, the country quickly ran out of dollar reserves. With over 58 percent of Sri Lanka’s government debt denominated in dollars, the government was not able to roll over or repay its outstanding loans. In late May, it defaulted on its entire $51 billion stock of external debt. The move came after months-long violent protests had resulted in the death of a ruling party lawmaker and in the resignation of disgraced prime minister Mahinda Rajapaksa.

Editor: Zhong Yao、Zheng Yifan

From:https://jacobin.com/2022/06/developing-world-dollar-debt-crisis-inflation.（2022-6-6）