Like in the 1980s
World Bank economist fears new debt crisis
08/22/2022, 12:35 am
World Bank economist Kose sees rising prices and weak growth as a threat to highly indebted emerging countries. If key interest rates rise rapidly around the world, the situation is likely to become problematic for them. A debt crisis like in the 1980s is conceivable.
A leading World Bank economist fears a repeat of the 1980s debt crisis. High inflation and weak growth are putting emerging markets at risk, Ayhan Kose, chief economist and director of the World Bank’s prospects group, told the Nikkei newspaper. A rapid hike in interest rates by global central banks is likely to put heavily indebted emerging markets in a precarious position.
According to Kose, there are clear similarities between the current situation and the debt crisis of the 1970s and 1980s, as less developed countries were crushed by high debt, inflationary inflation and a weak financial position. Higher commodity prices and disruptions caused by the coronavirus pandemic could exacerbate supply shortages and fuel inflation. This would create the conditions for stagflation – ie stagnating economic output with high inflation.
In the 1970s, Latin America was flooded with cheap credit. However, a debt crisis gripped the continent as early as the 1980s. The initially cheap loans of the 1970s became massively more expensive due to the rise in interest rates. The indebted countries had to take out more and more dollar loans to refinance the old debts. At this time, the countries of Latin America reached a point where their foreign debt far exceeded the economic strength of their economies and they were living beyond their means. The result was the cessation of debt service to foreign creditors.