Furthermore, a capital outflow will threaten emerging markets since their currencies would be weak against the dollar. Countries with current-account deficits and inadequate foreign exchange reserves will have to face the risk of dual crisis in currency and debt. Emerging markets debt has climbed to a record high of $58.5 trillion.
It’s hard to ease the global debt burden in a short term. The tax reform in the US will substantially reduce tax revenues of US federal government, thus adding pressure on the country’s finance in the long run.
The gross debt of emerging economies accounts for half of their total GDP figure. Latin American debt has been at a high point since the 1980s, with some low-income countries under heavy interest burden.
Various measures are needed to curb the breakout of a debt crisis, such as maintaining the robust economic growth. The global economy is currently in a rising period, creating a favorable condition to avoid a debt crisis.
Unnecessary fiscal stimulus should be avoided and a plan to pare debt and lower deficit should be mapped out. In addition, fiscal reforms should be carried out so as to optimize the tax system and improve productivity with human capital and physical capital.
Changing the currency structure of foreign debt is also effective to avoid too much exposure to the risks caused by relying on a single currency. Meanwhile, measures such as improving external balance, monitoring exchange rates and capital flows, and seeking bilateral cooperation or assistance from international financial institutions when necessary should also be taken to stop a debt crisis from breaking out and spreading.
(By Gao Haihong, a research fellow at the Institute of World Economics and Politics under the Chinese Academy of Social Sciences)