The Characteristics,Impact And Policy Measures Of Global Sovereign Debt Crisis In The Low-interest Rate Era

After the global financial crisis,the world entered the largest debt wave since WWII.The continuous debt accumulation in various countries has triggered academic concerns about a new wave of global crises.However,under the view of the "centerperiphery" world system,previous research on systemic risk mainly focuses on the developed economies,such as Europe and the United States,emphasizing the spillovers of crisis shocks from the centers on the outside countries.Low-and middle-income countries(LMICs)are on the periphery of the system,and economists tend to believe that their shocks would not threaten global stability.However,this view is facing serious challenges.In the past 20 years,the rise of a large number of LMICs represented by China has brought profound changes to the world landscape.LMICs have obtained an increasing economic power in the global system,and become increasingly active in participating in global economic governance.In this context,LMICs’ debt risk may become a new source of global crisis.External debt is one of the most important parts of LMICs’ debt composition.Although external debt default and unsustainable problems in LMICs have received much attention in the literature,previous research on the debt default crisis and its economic impact remain largely on the national level or regional level,and relevant economic welfare analysis only involves the interested parties to debt contracts.There is little research on the external impact of LMICs’ external debt accumulation,and neither little research can provide a complete theoretical framework for understanding the potential systemic risks caused by LMICs’ external debt unsustainability.To address this concern,this paper aims to answer whether LMICs’ external debt has the risk of triggering a global crisis through a large number of qualitative and quantitative empirical work,to provide a factual basis for academics and policymakers to understand the current international debt situation and grasp the changing trend of the global financial pattern.Further,a structural model is established to identify the mechanism underlying LMICs’ external debt expansion.Such an operation can help identify driving sources of credit shocks and provide guidance for policymakers to prevent potential global crises.Based on the research objectives,the analysis in this paper includes six parts:a summary of historical debt crisis regularities,systemic risk assessment,domestic economic growth forecast,world economic growth forecast,and credit structural shocks identification.First of all,by summarizing and sorting out the evolution law of the debt crisis cycle in the world,this paper investigates the characteristics of countries that have suffered frequent debt crises,to provide a reference for understanding the formation process and evolution trend of external debt risks in today’s LMICs.International experience shows that the worldwide debt default crisis is not rare,and has obvious cyclical and cluster features.External debt crises are more common in developing countries and developed economies that are in the stage of the emerging market.These countries generally suffer from poor international credit ratios,weak economic foundations,scarce hedging tools,international balance of payments imbalances,and poor external debt structures,and such problems make them more vulnerable to adverse external shocks.When the debt rises to a high level,a reversal of capital flows and a sharp devaluation of commodity prices could be key drivers of a large-scale external debt crisis.Reviewing history is an important starting point for this paper.Based on historical analysis,this paper qualitatively evaluates the systemic risk underlying LMICs’ external debt.According to the social network theory,the systemic impact of a country’s crisis depends on two key factors:one is the risk of the crisis,and the other is the status of the country in the whole network system.The greater risk of the crisis and the more importance of the country’s status in the system,the greater the systemic impact of crisis shock can generate.In line with this idea,this paper uses the IMF-WB framework to assess the risk of external debt sustainability of LMICs and uses social network centrality and continuous wavelet phase difference to measure the importance of LMICs in international debt markets and the world economic system.It is found that in the past 20 years,the external debt repayment pressure of LMICs has been continuously escalating,and growing countries have faced medium and high external debt pressure.The probability of LMICs’ external debt default crisis has increased significantly.At the same time,the gap of international debt investment network centrality between LMICs and high-income countries becomes narrow,and the phase difference between the economic cycle of LMICs and the world economic cycle shows a catching up trend until today.Both evidence confirms an increasingly important role of LMICs in global financial and economic activities.Combining the evidence above,it is reasonable to predict that once the external debt in LMICs becomes unsustainable,the crisis would cause a considerable systemic impact.After qualitative analysis,this paper investigates the domestic growth predictability of LMICs’external debt from a quantitative perspective and tries to judge whether the continuous external debt accumulation is sustainable in the long run.Economic theory suggests that there is a "U" shape relationship between debt and growth.If the debt level exceeds the safety threshold,the ongoing debt accumulation may distort economic incentives,and weaken the government’s ability to smooth consumption.The consequent debt trajectory would be unsustainable if there is no necessary debt management and policy adjustment.This paper confirms that the external debt growth has a significant negative predictive effect on LMICs’ economic growth in the next 1-5 years and that public sector foreign financing plays an important role in exacerbating the economic downturns.This evidence shows that quite many LMICs have entered the external debt service dilemma,and the trend of aggregate and public external debt growth cannot be sustained in a long run.A large body of robust evidence supports this conclusion.In addition,based on the characteristics of the national debt structure and opening up,this paper examines possible mechanisms for mitigating the risk of external debt.It is found that adjusting the debt level and improving liquidity conditions is not sufficient to effectively improve the relationship between external debt and growth.However,China’s opening experience is worth learning,that is,with the national income level improving,opening the trade market first and financial market later could help reduce the negative impact of external debt on the domestic economy in the LMICs.Based on the analysis of the domestic economic forecast,this paper further explores the predictability of LMICs’ external debt on the world economic growth from the perspective of externalities.By doing this paper tries to judge whether the LMICs’external debt expansion has an external spillover effect on other economies.To characterize the overall fluctuations of LMICs’ external debt accumulation,this paper uses a Bayesian dynamic factor model and construct a set of cycle indicator.It is found that the cyclical expansion of LMICs’ external debt does have a significant predictive effect on the world economic downturns,and the cyclical expansion of public external debt plays a prominent role in predicting the decline of world economic growth.A large number of sub-sample and cross-sectional out-of-sample tests further confirm the existence of negative external spillovers,that is,the economic growth performance of most countries and regions in the world,including high-income countries,is highly sensitive to LMICs’ total as well as public external debt cyclical expansion.In terms of the time trend and risk sources,this paper finds that the negative spillover effect of LMICs’ external debt is significantly enhanced in the post-crisis period,and the LMICs are of relative importance in the international debt investment network generate a larger negative spillover effect on the world economy.These findings suggest that the negative spillover effects of LMICs’ external debt are closely related to their rising status in the global system.Finally,based on the important role of the public sector in boosting LMICs’external debt accumulation and spillover effects,this paper constructs an SVAR model including four variables:public external debt,private external debt,economic output,and public external interest spread.Using the sign restriction identification method,this paper can effectively distinguish the differential impact of credit demand shock and credit supply shock on endogenous variables,and thus identify the driving mechanism underlying LMICs’ public external debt expansion.Impulse response results show that a unit positive credit supply shock will lead to the expansion of public external debt and a decline in output.On the contrary,a unit credit positive demand shock would lead to the expansion of both public external debt and output.There is no significant difference between the two types of credit shocks in explaining the endogenous variable fluctuations.This evidence shows that in the era of negative-interest rates,the capital easing environment rather than the sovereign borrowing demands plays a dominant role in driving LMICs’ public external debt expansion.Therefore,to prevent the potential global crisis,unilaterally effort by the debtor countries to maintain the sustainability of the balance of payments and external debt is not enough.Strengthening the coordination among the international community,promoting global governance reform,and improving the international capital flows management are particularly necessary and urgent.The report by the 19th National Congress of the Communist Party of China calls for a holistic approach to safeguard national security,balance economic development and security,and hold on to the bottom line of preventing systemic risks.This paper sounds the alarm for a new round of global sovereign debt crisis in the era of negative interest rates and calls for researchers and policy makers to pay more attention to LMICs’ external debt problems,and especially their potential systemic impact.Moreover,this paper can help policymakers more accurately grasp their position in the global financial and economic pattern,participate more actively in global economic governance,promoting the reform of the global governance system.This study responds to the needs of The Times and highlights China’s spirit of "responsibility and responsibility as a major country".