The International Monetary Fund (IMF) has said a “wave of debt crises” may be coming in the Global South, and “the global economy is headed for stormy waters,” as the world faces a “geopolitical realignment” that will be “permanent.”
The US-dominated financial institution warned “the worst is yet to come,” as the depreciation of most currencies against the dollar and rising interest rates make it hard for both governments and companies to service their dollar-denominated debt.
The director of the IMF’s research department, Pierre-Olivier Gourinchas, made these comments in a press briefing on October 11.
Countries comprising a third of the entire global economy are expected to contract in 2022 or 2023, he prognosticated.
“In short, the worst is yet to come; and for many people, 2023 will feel like a recession,” he said.
Gourinchas explained that “the energy crisis, especially in Europe, is not a transitory shock. The geopolitical realignment of energy supplies in the wake of the war is both broad and permanent.”
Furthermore, the rallying of the US dollar against most other currencies could fuel a global economic crisis, he warned.
“The strength of the dollar is also a major challenge. The dollar is now at its strongest since the early 2000s, mostly against advanced economies but also against emerging markets,” the top IMF researcher said.
He advised Global South nations to conserve “valuable foreign exchange reserves for when financial conditions really worsen,” cautioning, “as the global economy is headed for stormy waters, now is the time for emerging market policymakers to batten down the hatches.”
“Too many low‑income countries are close to or are already in debt distress. Progress toward orderly debt restructuring,” he said, “is urgently needed to avert a wave of sovereign debt crises. Time may soon run out.”
He acknowledged, “there is, effectively, a serious issue of debt restructuring that is needed for a number of especially low‑income countries.”
With the significant appreciation of the US dollar against many currencies, someone at the press conference asked the director of the IMF’s research department, “is it necessary or possible for us to have another Plaza Accord sometime down the road?”
The 1985 Plaza Accord was an agreement between the United States, Britain, France, Germany, and Japan to depreciate the dollar against their currencies. This led to an overvalued Japanese yen, fueling an asset bubble that popped in the 1990s. Japan’s economy has never really recovered from this crisis.
Gourinchas responded to the question stating:
The strength of the dollar is certainly putting a lot of strain on a number of countries. I mean, it works through two channels.
One, it is making the price of imported goods, which often are invoiced in dollars, higher. So that is increasing inflation pressures in other countries.
And then it is also tightening financial conditions. A lot of corporates or governments have dollar debt, and that becomes more expensive to service as the dollar appreciates.
Explaining why the dollar is rallying so much, Gourinchas identified the “fundamental forces” as Fed interest rates and the “energy crisis.”
“It is really the fact that the Federal Reserve has increased interest rates quite aggressively in 2022 so far — is expected to do more — compared to other countries,” he said.
“And it is also reflecting the energy crisis, that a lot of energy importers are impoverished by the high price of energy, and that is reflected in a weaker currency for them,” he added.
In the same press conference, the division chief of the IMF research department, Daniel Leigh, noted that, in Africa, “the higher interest rates, low growth means that two‑thirds of the countries in the region are facing stress or debt distress.”
Leigh warned that they must “avoid the debt crisis from spreading.”
The mainstream financial press has been sounding similar alarm bells.
A market analyst for Reuters, John Kemp, wrote that the “risks to other economies from inflation and rising interest rates in the core have been understood by policymakers and investors for decades.”
He added, “But as long as the Fed’s mandate requires it to focus exclusively on domestic inflation and employment, ignoring international spillovers, and the dollar remains the main reserve currency, rising rates in the United States will continue triggering instability elsewhere.”
Geopolitical economist Radhika Desai argues today is not like the Volcker shock of the 1980s
Multipolarista editor Ben Norton discussed the comments made in this IMF press conference with geopolitical economist Radhika Desai.
She argued the global economic and political situation today is not like the “Volcker Shock” of the 1980s, when persistent stagflation in the United States led Federal Reserve chair Paul Volcker to substantially raise interest rates, resulting in a highly overvalued dollar that fueled a Third World debt crisis.
“I think we are a very long way away from a 1980s-style crisis,” Desai said.
“Some countries will definitely face a financial crises,” she anticipated, but “the situation is very different, and the context is very different.”
In the Volcker shock, Fed interest rates went to nearly 20%, Desai pointed out, but today many economists do not expect it to surpass 5%.
Desai also stressed that, despite interest rate hikes up to roughly 4% as of November 2022, the real Fed rate is still technically negative, because inflation is larger than the federal funds rate.
“We are not there. And the reason for that can be summed up in a single word… financialization,” she said.
“When Paul Volcker did what he did, he didn’t have to worry about the huge mountain of debt, and speculative asset markets, and so on, which were all reliant on a long regime of low interest rates,” Desai argued.
She also noted that the increasing Fed interest rates in 2022 still “remain short of the peak that they reached in the early 2000s, the peak at which they burst the housing and mortgage credit bubbles.”
Current Federal Reserve chair Jerome Powell knows that “he cannot take interest rates above a certain amount, because it would bring the entire [financial] house of cards crashing down,” Desai said.
The Federal Reserve always uses inflation rates and unemployment rates to justify its policy decisions as though it is making policy in the interest of ordinary Americans, and even the world.
But in reality, the main thing that the Federal Reserve, in a long string of chair people of the Federal Reserve, going back to at least Alan Greenspan, what they have been primarily concerned about is the vast quantity of elite wealth that rests on said house of cards.
They will not bring it down, because who pays the piper calls the tune.
And we extol it [the Fed] as an “independent” central bank. In reality, it is only independent of ordinary people’s interests. It is completely dependent on the elites. And so they are not going to do anything to destabilize elite wealth.
And already we are seeing the Federal Reserve basically making noises about how they cannot allow interest rates to go very high.
There will probably be a lot of debt crises, because some countries are far more vulnerable than others. But in this context we will also see something else.
We will see increasing contestations between the Western world and China, where the Western world will constantly accuse China of being responsible for the developing countries’ debt crisis. And there will be a tug of war between the Western powers in China, as to, if there is a debt crisis, who will be paid back first.
So we are going to see all of these shenanigans. But underlying all of them, what we will also see is increasingly a move away, for all the countries which can do it, will try to move away from borrowing from what Michael Hudson and I have called the dollar creditocracy.
Because it is precisely this dollar creditocracy which is subject to such volatility, that you cannot borrow with any security that you will be paying back only what you agreed to pay back, rather than some insane amounts, simply because the Federal Reserve decides to raise interest rates, or simply because speculators decide to leave your currency and your country and go somewhere else.
So the world needs a more secure financial system. And for the last 70 years and more, the world has been prevented from having the international financial system it really needs, that would really promote development, because the United States has wanted to impose its own will and its own currency on the rest of the world.
Ben Norton is a journalist, writer, and filmmaker. He is the founder and editor of Multipolarista, and is based in Latin America.
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