IMF Sounds Alarm on Emerging Markets Debt Crisis

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The coronavirus pandemic has left banks in emerging markets — including those in Asia-Pacific — holding record levels of public debt, raising the odds that pressures on public finances could threaten stability, according to the International Monetary Fund.

The average public debt-to-gross domestic product ratio – a key measure of a country’s fiscal health – hit a record high of 67% last year in emerging markets, according to the latest Global Financial Stability Report. IMF.

Many emerging markets face particularly difficult conditions, such as China, where financial vulnerabilities remain high amid continued stress in the real estate sector and new Covid-19 outbreaks, the fund said.

“Authorities need to act quickly to minimize this risk,” the IMF added, saying governments in emerging markets are heavily dependent on their banks for credit.

Securing Central Bank Funding

These banks in turn rely heavily on government bonds as an investment that they can use as collateral to obtain central bank funding.

“Large holdings of sovereign debt expose banks to losses if public finances are under pressure and the market value of public debt declines,” the IMF said.

“This could force banks – especially those with less capital – to cut lending to businesses and households, which would weigh on economic activity.”

As the economy slows and tax revenues decline, public finances could come under even more pressure, further tightening banks and creating a destructive “catastrophic loop”.

The IMF said such a loop could be triggered by a sharp tightening of global financial conditions, leading to higher interest rates and weaker currencies as monetary policy normalizes and tensions intensify. caused by Russia’s war in Ukraine.

This could undermine investor confidence in the ability of emerging market governments to repay their debts. A domestic shock, such as an unexpected economic slowdown, could have the same effect, the fund says.

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george russell

George Russell is a Hong Kong-based freelance writer and editor who has lived in Asia since 1996. His work has appeared in the Financial Times, Wall Street Journal, Bloomberg, New York Post, Variety, Forbes, and South China Morning Post. . .

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