That has happened before. Indeed, it is what happened in Latin America after the debt crisis of 1982. This crisis, it should be recalled, also followed a surge in private lending to developing countries, then called the “recycling” of the surpluses of oil exporters. Unhappily, this surge in debt was followed by Iraq’s invasion of Iran, a second “oil shock” , a spike in inflation, a sharp tightening of US monetary policy and a stronger dollar. A disaster ensued – a debt crisis lasting a decade.
It is helpful that borrowing this time was not so much from banks at variable rates, but in bonds, which have longer maturities and fixed rates. Nevertheless, a sudden cut off in the flow of credit will create a merciless squeeze. The World Bank shows a rise of 17 percentage points in spreads on sovereign borrowing in foreign currencies of commodity importing countries with weak credit ratings in 2022. Effectively, these countries are shut out of markets.
We know, in addition, that many children lost parents during the pandemic and that their education was also seriously disrupted. Furthermore, physical investment has fallen sharply. Thus, for emerging and developing countries as a whole, the bank forecasts that aggregate investment in 2024 will be 8 per cent lower than expected back in 2020.
Source: Loan Digest (loandigest.net)
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