They warn of “serious risks” of a global debt crisis: what consequences it would bring

One of the main problems that the economies of the world’s great powers went through was the increase in global debtfollowing the Covid-19 pandemic. In this regard, experts believe that “There are serious risks”but they see it as unlikely that policymakers will allow it to get out of control and trigger “a great calamity”.

One of those who spoke about the current global debt situation is Holger Schmiedingchief economist of Berenberg. For him, the way out of the inflation that skyrocketed due to the pandemic was the increase in interest rates by banks, which could have “easily scared” the bond market, something that ultimately did not happen.

“With the exception of a few isolated cases in some emerging markets and a brief episode of post-Brexit turmoil in Britain, investors continued to buy record amounts of bonds throughout this period. Now that central banks are cutting rates again, we are past the maximum risk“, said.

And he added: “A debt crisis does not seem imminent. Although, of course, serious risks remain“-

Despite this, Berenberg considers that “US fiscal policy is unsustainable”and that maintaining deficits of 7% of GDP while the economy grows at a good pace, as happened in the last three years, is a sign that “big problems are coming”.

Despite this, they believe that the US bond market is still the preferred safe haven by global investors.

Similarly, Schmieding states that in times of high geopolitical riskscapital inflows to safe havens They allow the North American country to “get away with its fiscal follies” for longer than almost all other countries.

“Unless the United States embarks on a new orgy of tax cuts (or spending) After the election, the bond watchdogs will probably let it slide for the next three years,” he emphasizes.

Calm down: until when?

For this expert, the calm may not last long more so if the “dysfunctional” American policy does not offer hopes for a return to prudence in the future.

“At some point, markets will likely force the United States to adjust its fiscal stance the hard way. Almost by definition, politics cannot remain unsustainable forever,” says the German analyst.

Besides, There are other side conflicts such as emerging markets not paying their debts in the coming years and serious problems brewing in the “less transparent” corners of the global debt and derivatives markets.

“While policymakers in much of the world learned a key lesson from the catastrophic form in what The United States handled the Lehman crisis in September 2008,” he adds.

“Are aware of the risks of contagion and they know how to contain them. “It therefore seems unlikely that the current generation of policymakers will allow any of the isolated debt crises that seem likely in the coming years to spiral out of control and trigger a major global calamity,” Schmieding concludes.