Fed rate hikes can intensify a global debt crisis, research has warned

January 25, 2022: -Interest rate hikes from the U.S. Federal Reserve and other central banks can worsen a global debt crisis, particularly for developing countries, according to the latest report from U.K. non-profit the Jubilee Debt Campaign.

The Federal Open Market Committee meets this week to decide the path for its tightening monetary policy as it looks to contain soaring inflation.

Few analysts expect the central bank to hike rates four times from their pandemic-era lows in 2022.

In a report published, the Jubilee Debt Campaign highlighted that developing countries’ debt payments increased 120% between 2010 and 2021 and are currently at their highest since 2001. The middle portion of government revenues channeled toward external debt payments increased from 6.8% in 2010 to 14.3% in 2021, with prices shooting up in 2020.

The report suggested that the sharp increase in debt payments is hindering countries’ economic recovery from the pandemic. Rising U.S. and global interest rates in 2022 could exacerbate the problem for many lower-income countries.

Kristalina Georgieva, the managing director of the International Monetary Fund, said in the previous week that Fed rate hikes could “throw cold water” on already weak recoveries in certain countries. Higher U.S. interest rates, and thus an increase in the greenback, could make it expensive for countries to meet their dollar-denominated debt obligations.

“The debt crisis keeps to engulf lower-income countries, with no end in sight unless there is sudden action on debt relief,” said Heidi Chow, executive director of the Jubilee Debt Campaign.

“The debt crisis has stripped countries of the resources needed to tackle the climate emergency and the continued disruption from Covid while increasing interest rates threaten to sink countries in even more debt.”

Chow calls on G-20 leaders to stop “burying their heads in the sand” and argues that the global economy needs a “comprehensive debt cancellation scheme as soon as possible which compels private lenders to take part in debt relief.”

The organization’s debt data portal indicated that 54 countries worldwide are facing debt crises insofar as debt payments hamper governments’ ability to preserve citizens’ economic and social rights.

Almost 14 countries are at risk of both public and private debt crises, while 22 are in danger of a solely private sector debt crisis and 21 a public sector crisis.

Of all external debt payments owed in 2022 by low and lower-middle-income governments, 47% are to private lenders, 27% multilateral institutions, 12% China, and 14% different governments, according to JDC figures.

In a tweet in the previous week, World Bank President David Malpass called for urgent debt relief, enhanced debt transparency, and a rebalancing of creditor and debtor powers. The G-20 created the Common Framework in 2020, which intends to aid countries facing insolvency and protracted liquidity problems.