Assessing the Risk of Debt Crises in G-7 Countries

The Group of Seven (G-7) major economies are generally well-positioned to ride out rising interest rates and the impending global recession without sliding into a broader systemic debt crisis. Italy, however, may be the one exception. As central banks around the world try to contain rising inflation, they are increasing their nominal interest rates for the first time since the global economic crisis in the late 2000s. Rising interest rates make government debt service more onerous. And since the government debt of developed nations is already high, worries about debt sustainability are on the rise. The United Kingdom recently exemplified this situation when yields on the country's long-term bonds (also called gilts) spiked following former Prime Minister Liz Truss's ill-considered fiscal policy decisions in early September. While Truss's resignation and the appointment of new U.K. Prime Minister Rishi Sunak in late October helped reverse bond and currency losses, some observers...