The next financial crisis could start with advanced economies’ sovereign debt

FOR much of the past four decades, financial crises were often associated with emerging markets. The Latin American debt crisis, Asia in 1997, Russia in 1998 and Argentina in 2001 shared a familiar pattern of excessive borrowing, capital flight and abrupt reversals in investor confidence.

But major crises have not been confined to emerging markets. The 2007-2008 global financial crisis originated in the US, while the eurozone sovereign debt crisis and the UK gilt market turmoil of 2022 demonstrated that advanced economies can themselves become sources of instability.

Today, the balance of risks is shifting further. Public debt is at historic highs across many advanced economies, deficits remain elevated and sovereign bond markets are more sensitive to inflation, interest rates and investor confidence.