A fiscal storm is coming but nobody is battening down the hatches

It’s one thing for the US, a dominant and dynamic economy, to max out the credit card, but quite another for almost everyone else.

It’s sometimes said that provided you have your own currency, debt doesn’t matter. In extremis you can always print your way out of trouble. This is nonsense.

The point of no return happens well before governments start monetising the debt, and once they do it’s game over: rapid currency depreciation and rampant inflation quickly follow, as we have seen repeatedly in emerging markets.

It’s true that advanced economies are in general better placed to sustain high debt-to-GDP ratios than most countries in the developing world.

Debt-to-GDP in Kenya, for instance, is still below 75pc of GDP, or not that much higher than Germany relative to output. Kenya is also a high-growth economy, with some chance therefore of outgrowing rising debts.

Yet it is still in fiscal crisis, with nearly 30pc of all government revenue eaten up by interest costs. Attempts to raise the tax burden to match have prompted riots, followed in short order by a screeching about turn. This merely confirms the sense of instability, further increasing Kenya’s cost of borrowing, which in turn further adds to the risk of default.

Rising interest rates since the pandemic mean that many developing economies are spending more on debt-servicing costs than they do on education and healthcare. It’s a downward spiral to oblivion. The World Bank reckons that nearly a half of all emerging markets are vulnerable to a debt crisis.

Supposedly “rich” economies are assumed to be largely immune to these trends, but for how much longer? In Europe, France’s increasingly perilous fiscal condition shelters within the walls of monetary union with Germany. Patience is wearing thin. The German cheque book will not forever stand ready to pay for French profligacy.