Project SyndicateProject Syndicate

The looming financial contagion

By Kenneth Rogoff

02 Jan 2023 · 3 min read

Editor's Note

In Project Syndicate, a Harvard economics professor argues that rising interest rates will create a “huge stress test” for the global financial system—and that could be especially the case for Europe.

CAMBRIDGE – The fact that the world did not experience a systemic financial crisis in 2022 is a minor miracle, given the surge in inflation and interest rates, not to mention a massive increase in geopolitical risk. But with public and private debt having risen to record levels during the now-bygone era of ultra-low interest rates, and recession risks high, the global financial system faces a huge stress test. A crisis in an advanced economy – for example, Japan or Italy – would be difficult to contain.

True, tighter regulation has reduced risks to the core banking sectors, but that has only led to risks shifting elsewhere in the financial system. Rising interest rates, for example, have put huge pressure on private-equity firms that borrowed heavily to buy up property. Now, with housing and commercial real estate on the cusp of a sharp, sustained drop, some of those firms will most likely go bust.

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