How the Fed Helped Create Another Calamity: The Ongoing Emerging Market Debt Crisis

Source: Ludwig von Mises Institute
by Joseph Solis-Mullen

“When in March the Federal Reserve finally moved to belatedly embark on a series of rate hikes to slow the hottest inflation in the United States since the 1980s, it signaled impending trouble for many emerging market economies. Often unable to market securities denominated in their own unstable currencies to international investors, many emerging market borrowers turn to floating bonds denominated in a major foreign currency, still overwhelmingly US dollars, to gain better access to global credit markets. Borrowers then make payments on those bonds by spending their reserves of that currency or, more often, by purchasing the necessary currency on the open market. This makes these borrowers particularly vulnerable to rises in interest rates, which can quickly and substantially raise their debt burdens, imperil their continued debt service, and threaten their wider local economies.” (09/13/22)