ICYMI David Rosenberg: The economies best positioned to withstand rising rates
The combination of elevated debt levels, rising interest rates and weak economic growth increases the odds of sovereign defaults, which, in turn, have potential to spill over to an already-weakened private sector via ties between government and banks.
Among advanced economies, Japan and New Zealand have led the charge in terms of debt accumulation , both having an increase of more than 20 percentage points in their gross debt-to-GDP ratios. Others, including the United States, Canada and major eurozone economies, have also had double-digit increases over the past three years.Article content
This year’s inflation shock has prompted a U-turn in central-bank policy, pushing up interest rates across the yield curve in most countries, leading to higher borrowing costs for governments. For instance, 10-year government bond yields have shot up since the start of the year by about 3.5 percentage points in Greece, Italy and the United Kingdom . In emerging markets, 10-year yields have shot up as well: Mexico , Korea , South Africa and Brazil .
The debt-service shock is less acute in emerging markets given their relatively lower government debt levels, although still significant, at around one per cent of GDP in places such as Korea, Brazil, South Africa and India.This is not to say that emerging markets are in the clear. The strong U.S. dollar represents a major risk to that group, given that nearly 16 per cent of public debt is denominated in foreign currencies .