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Rising rates break indebted countries
The US interest bill
At a five-point rise it goes north of 40%, and with the government borrowing $2 trillion every year, it goes north of 60%. Much of the debt is short duration and rolls over every five years. The US has a way out: if data centers get built in America, the tax base grows, and corporate income is less than 10% of federal revenue while 80% or more comes from payroll and income taxes that shrink as automation spreads.
Who breaks first
Countries with a lot of debt, little tax revenue, and debt serviced often, such as Pakistan or Nigeria, would take the worst of it. The 1980s show how it can go: Fed Chair Paul Volcker raised rates to fight inflation, real rates reached about 8%, and some 40 countries, mostly in Latin America, defaulted that decade.
Crowding out the rest
The squeeze reaches beyond governments. Consumer packaged goods companies, telecoms, and banks all use a lot of debt, and they all pay more when the spread between the government's rate and what everyone else pays widens because giant borrowers like Amazon are competing for credit. That crowding-out is why fewer gigawatts get built than pure, simple economics would build.
Why did Volcker raise rates so high?
US inflation reached about 14 percent in 1980, and Paul Volcker became Fed chair in 1979 intent on bringing it down. The federal funds rate peaked near 20 percent in 1981. Inflation fell below 4 percent by 1983, but the US went through two recessions in the process.
How did the 1980s debt crisis spread?
Many Latin American governments had borrowed dollars from banks at variable rates, so higher US rates raised their payments directly. Mexico announced in August 1982 that it could not meet its debt payments, and others followed. Growth in the region stalled for much of the decade, which is why it is called the lost decade.
Why does short-term debt raise rate risk?
Short-term debt has to be rolled over at whatever the current rate is when it matures. A government that borrows mostly short-term feels a rate rise within a few years, while one with long-term fixed debt feels it slowly. US Treasury debt has had an average maturity of about five to six years in recent years.
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