The Corner

Economy & Business

Watch for Emerging Economies to Be Hurt by Dollar-Denominated Debt

President Donald Trump’s spending hikes and tax cuts have alarmed deficit hawks, who fear that rising federal deficits pose serious dangers to the United States. In a new essay for Foreign Affairs, however, CFR’s Brad Setser argues that it isn’t the United States that should be worried. Rather “the first causalities of a somewhat irresponsible U.S. fiscal policy are likely to be emerging economies that have used the dollar to denominate their debts.”

In particular, it will be those countries that have dollar-denominated debt and those that import oil that will suffer. For example, Setser writes, over several years, the Argentinian government issued billions in bonds. Those dollars went to pay for imports, a strategy that soon revealed itself to be unsustainable. In May, the country had to take out a $50 billion loan from the IMF. Yet with the dollar on the rise, that debt will become even harder to pay down. Turkey, meanwhile, offers another tale of woe. That country “got in trouble because greater borrowing by domestic firms last year pushed up the country’s trade deficit, and the resulting increase in its need for foreign funding left it vulnerable to a rising dollar and higher oil prices.”

Countries that save more — especially those with excess savings that they need to dump into other economies — and those with oil to export will fare much better. Oil prices are on the march, and thanks to America’s rising interest rates, it is an attractive bet for countries looking to make loans. The problem remains, though, that emerging economies with dollar-denominated debt will find it hard to dig themselves back into the black. They will also find it difficult, Setser concludes, to access the non-dollar debt that saving countries are looking to offload: They’ll have a tough time competing for it against a United States that seems ready to throw fiscal caution to the wind.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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