Foreign Policy identified a group of D7 countries with the risk of “domino devaluations”

The world’s seven largest economies are saddled with debts greater than their annual GDPs, and never before have they been coupled with interest rates this high, Daniel Altman, founder of the High Yield Economics newsletter, wrote in an article for Foreign Policy. He sees similarities to the financial crises of the 1990s in Asia and RUSSIA, but on a much larger scale, with the risk of a “domino effect” of major currencies.

The economist recalls the estimates of the International Monetary Fund, according to which in CANADA, France, Japan, Spain, Italy, Great Britain and the United States the debt exceeds 100% of GDP. Altman calls them the D7 – the Big Debt Seven, a group of the largest international debtors by analogy with the global G7 alliance.

Over the past three years, rates on bonds from countries Altman has grouped together as the D7 have risen sharply. High borrowing costs are weighing on debt markets and making subsequent placements difficult, he warns, noting that if “one domino falls, it will affect the others.”

“This domino could be the first in a series of devaluations that could be triggered by both speculators and governments themselves – the national debt is denominated in national currencies, which makes it possible to control the volume of liabilities,” he believes, calling it a “clever trick” since devaluation is accompanied by inflation, which reduces the pressure of debt on the budget and allows avoiding difficult political decisions to cut spending or raise taxes.

“Such events can begin without warning and escalate at breakneck speed,” Altman warns, suggesting that a possible devaluation in any one of the D7 countries would spread to the others through “three economic mechanisms.”

The first  is the classic “beggar-thy-neighbor” policy, when measures to combat a crisis in one country are taken without taking into account their possible negative impact on neighboring countries.

The second , the expert continues, is connected with the behavior of investors, who will reassess risks and revise portfolios. In the event of a devaluation of the American DOLLAR, investment fund managers will begin selling off Canadian assets, Altman gave an example.

The third is related to the structure of the reserves of the central banks themselves, some of which are denominated in the currencies of other countries, and the devaluation of any of them automatically reduces the volume of foreign exchange reserves, the economist concludes.