The current financial stability issues facing the global economy are not only the result of the legacies of the coronavirus disease (COVID-19) crisis, but also of peculiar features of the recovery process under way and the economic effects of the geopolitical risks generated by the Russian invasion of Ukraine. The legacies include the high debt levels facing essentially all economies, and changes in labour markets in some of them (a reduction in labour market participation, in particular). The peculiarities are associated with global inflationary trends – the worst in several decades – which originate not so much in high aggregate demand but in a mix of supply problems that became evident in the last months of 2021 but have worsened with the invasion of Ukraine. The response of the United States (US) Federal Reserve has been to start to increase interest rates and dismantle quantitative easing. The European Central Bank is also reducing quantitative easing, and long-term euro rates have also started to increase although it has not announced changes in interest rates. The mix of rising interest rates and high debt ratios will not have strong effects in developed countries but is affecting stock markets, which experienced a boom during the crisis thanks to the expansionary monetary policies adopted to manage it. In emerging and developing countries, the problem is more complex since several monetary authorities have increased interest rates on a broader scale, and the mix of high debt ratios and rising international interest rates generates additional risks – particularly of a reduction in private external financing and open debt crises in some countries. This limits their capacity to adopt expansionary macroeconomic policies – a policy space that, in any case, was weaker for most of these countries during the COVID-19 crisis. This paper examines these issues. The first section covers global conditions. It analyses the trends in interest rates and stock markets, and briefly discusses the challenges associated with the insolvency of some private firms – though with no sign of possible banking crises – as well as the risks generated by crypto assets and the financial effects of climate change. The second section concentrates on the issues affecting emerging and developing countries in relation to debt ratios, and the possible effects of changing global financial conditions on capital flows, both in terms of availability and cost. The last section presents brief conclusions.
