Emerging-market crises have become harder to resolve

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Instead of sudden crises that spill back across borders and to Wall Street, many places face slower-burn and home-grown dangers: inflationary spirals or zombie banks

Save time by listening to our audio articles as you multitaskThe archetypal emerging-market crisis was in 1997-98. As the Fed raised rates, pulling capital back to America, Thailand’s currency peg broke, leading to a panic that floored South Korea and Indonesia. It then spread to Brazil and Russia, and to, a Wall Street hedge fund that collapsed. Calm was restored by the Fed and Treasury cajoling American banks to roll over loans, and by the.

The final change is that even where foreign creditors are important, their profile is different. For example, the “Paris Club” of creditors, which is composed mostly of rich countries and multilateral institutions such as the, accounts for less than 60% of the poorest countries’ debts, down from more than 80% in 2006. China accounts for about a fifth.

The good news is that panics in emerging markets seem less likely to inflict serious damage on the rest of the world. We calculate the countries most at risk of default today account for only 5% ofand 3% of global public debt. The bad news is that these places have 1.4bn people, or 18% of the global population, and face a huge humanitarian challenge with higher inflation, debt loads, interest rates and expensive oil and food.

Furthermore, the new distribution of their debts means it is harder to strike deals to provide them with debt relief. The West does not want to give aid that flows into the pockets of Chinese creditors. China is reluctant to participate in debt restructuring, even though any modern-day rescue committee needs a member from Beijing. As a result, even if emerging-market crises pose less of a danger to the global economy, they may pose more of a threat to the people living through them.

 

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