In the past, discussions about Federal Reserve rate hikes and tightening dollar liquidity typically started from the premise of capital flowing back to the United States, searching for emerging market countries with high external debt and insufficient reserves.
The biggest difference in this cycle is that emerging markets have strengthened their traditional external financing buffers against a strong dollar, while developed economies are facing greater pressure.
Looking back at the policy cycle since 2022, from the UK pension crisis to the US regional bank turmoil and then to France's fiscal austerity predicament, the interest rate and balance sheet risks of developed economies themselves have been repeatedly exposed.
Now, the more significant marginal change lies in the fiscal burden.
Post-pandemic fiscal expansion that cannot be reversed has left behind higher stock debt, while primary deficits have persistently failed to converge, and high interest rates continue to erode overall fiscal space through debt servicing pressure.
As US and European government bond yields remain elevated, along with concerns about the Fed's tightening cycle, financing constraints on core developed economies are increasingly tightening, and the tightening effect will transmit outward along the financing cost and collateral chains.
Beyond this, the real price level pressure brought by high inflation continues to drive the global populist cycle that has been unfolding since 2008, with opposition parties riding public sentiment to promote welfare plans that do more harm than good, making it even harder for ruling parties to substantively advance deficit reduction.
Monetary authorities, as bureaucratic institutions, are extremely insignificant in the face of the rolling pressure to roll over stock debt from the low-interest-rate era, the unstoppable trend of technological development, and increasingly intense populism.
In summary, there is a need to reassess the stability of US and European markets as the global interest rate benchmark, which is precisely the core meaning of "the US and Europe are replacing emerging markets as the source of financial risk."
Fiscal Pressure Is Common, but Developed Economies Face More Pronounced Deterioration Due to Primary Deficits
Fiscal pressure in both developed and emerging economies has already exceeded pre-pandemic levels.
Based on 2026 forecast projections, the G7 fiscal composite index (total debt, interest burden, and primary deficit) has risen by approximately 0.67 points compared to 2019, slightly higher than the 0.59-point increase for EME13.
What deserves more attention is the source of deterioration: primary deficits contributed about half of the G7's increment, while EME13's pressure mainly comes from debt and interest payment burdens.
Although the G7's fiscal pressure has not exceeded the peak levels of 2010 and the pre-pandemic range, it has remained above the average level for an extended period, and the problem of slow fiscal expansion exit has become very prominent.
To some extent, the market has grown accustomed to occasional fiscal risks and interest rate pressures in countries like India, Brazil, and Turkey, but it reacts with alarm to 10-year US Treasury yields above 5% and 30-year US Treasury yields at 5.5% — the core reason being that high interest rates in developed economies can transmit downward, while high interest rates in emerging markets cannot flow upward.
Rising US Treasury yields directly raise the financing benchmark for bonds and amplify selling pressure through margin calls and leverage contraction; high credit quality does not prevent developed country government bonds from becoming the starting point of liquidity shocks.
On the other hand, the resilience of developed markets also means that no substantive sovereign risk needs to occur — pure market risk alone can constrain other assets; the decline in the stability of core developed economy government bond yields, as well as changes in stock-bond correlations, are themselves very much worth re-examining.
Therefore, it must be emphasized that emerging markets remain the pressured side, and new shocks still come from the global financing benchmark rate itself — including both the higher bond yields traded by the market and the higher policy rates set by central banks.
Easing inflation can lower short-end policy rate expectations, but fiscal financing and gradually diminishing duration absorption capacity still require higher long-term compensation.
A very important point here comes from the excessive indulgence of "primary deficits": if interest payment pressure has some degree of passive attribute — namely the linkage between global interest rates and monetary policy cycles — then "primary deficits" are almost entirely the result of proactive government action — rate cuts can alleviate interest payment pressure but cannot replace adjustments to fiscal revenue and expenditure themselves.
More critically, the side effects of debt rollover are gradually emerging.
As long as the coupon rates on maturing low-interest-era debt are below current levels, even if market rates stop rising, the average interest payment cost will continue to increase; if primary deficits do not converge, new financing and maturing refinancing will continue to stack up.
The sensitivity of high debt to the difference between financing costs and nominal growth will also be amplified accordingly.
US Treasury debt best illustrates this chronic pressure: from 2019 to now (2026 is an estimated level), its debt ratio has risen from 108.8% to 125.8%, an increase of about 17 percentage points; net interest payments as a share of fiscal revenue have risen from 7.6% to 12.6%, an increase of about 5 percentage points, but the primary deficit has remained stagnant at around 3.5% of GDP — the stock interest burden that the economy and tax revenue still need to digest coexists with the fiscal flow that still needs financing in the future.
Major European economies show notable differences, and these differences precisely demonstrate that beyond stock debt pressure, revenue and expenditure adjustment capacity also determines the direction of pressure.
France faces simultaneous increases in primary deficits, debt, and interest payment burdens; Italy still has a primary surplus, but its high stock of debt makes it more sensitive to the combination of financing costs and nominal growth.
Spain, with improving primary balances and relatively small changes in its debt ratio compared to 2019, has actually performed better.
For high-debt countries, whether a sustained primary surplus can be achieved directly affects fiscal maneuvering space after financing costs rise — but to achieve a primary surplus, some degree of fiscal austerity must be implemented, which for developed economies seems to have fallen into an unsolvable loop.
It is worth noting that the above indices measure each country's pressure level relative to its own history; a flattening score does not mean the actual situation has stopped deteriorating.
The US fiscal index is only 0.07 points higher than in 2019, but the reality is that the US debt sub-index has already hit the scoring ceiling, and the interest payment sub-index is also approaching the ceiling, making it difficult for new burdens to further push up the score.
At this point, one should return to absolute numerical levels — namely the $40 trillion federal total debt level and the annual $1 trillion net interest expenditure burden.
Today, the fiscal problems of developed economies lie not only in the large scale of debt but also in the increasing difficulty of reducing deficits.
However, whether through raising revenue or cutting spending, both affect household income and are prone to voter opposition.
Moreover, as populism has strengthened again after the public health event, political resistance to fiscal austerity has also increased.
The reason is that populism is mainly related to income distribution.
As income and wealth gaps widen, voters begin to demand more protection from the government, forming different populist agendas — the left advocating expanded welfare and the right advocating protection of domestic industries.
Since then, populism has gradually become a factor influencing economic activity.
Although the policies proposed by the left and right differ, both increase the difficulty of fiscal adjustment, which is mainly reflected in the intertwining of left-wing and right-wing populism from the 21st century to the present.
The left is more concerned with income inequality, therefore advocating higher minimum wages and expanded social welfare.
But to offset related expenditures, the left typically supports raising taxes on high-income groups and corporations.
In contrast, the right is more concerned with immigration and industrial relocation, so it tends to advocate restricting immigration and protecting domestic enterprises through tariffs; at the same time, the right typically supports tax cuts and fee reductions.
The two types of policies appear opposite, yet share one commonality.
Whether expanding welfare or reducing tax burdens, both easily gain support from specific voters.
Populism makes it harder for governments to solve debt problems.
Because cutting spending faces electoral pressure, short-term fiscal support is more easily converted into long-term burdens.
Emerging Markets' Buffers Have Clearly Increased, and Broad Vulnerability Has Remained Stable
The reason a strong dollar easily triggers external financing crises is that it simultaneously tightens financing conditions and, when there are foreign currency liability mismatches, increases debt servicing pressure on overseas entities.
If domestic credit is still expanding and the current account depends on sustained capital inflows, currency depreciation will intensify refinancing constraints.
The most dangerous combination in past crises was the simultaneous imbalance of external debt, credit expansion, and external financing gaps, but this has not occurred currently.
The fiscal deterioration of emerging economies in recent years has not significantly pushed up their broad vulnerability, with the core reason being that fiscal is only one component of risk.
Using the 13-country six-indicator complete data methodology, the index stands at approximately 2.61, slightly below the 2015-2019 average level of 2.66 — at that time, the Fed's peak rate was only 2.5%, and 10-year US Treasury yields were barely above 3%.
It can be said that the more severe financial environment of the past few years has actually forged more resilient risk resistance in emerging market countries.
The evolution of fiscal weakness into an external financing crisis also requires amplification mechanisms through balance sheets.
With smaller financing gaps, slower credit expansion, and thicker reserves, the same strong dollar shock is less likely to evolve into comprehensive debt pressure and refinancing crises.
These buffers are precisely the key to understanding the resilience of emerging markets in this cycle.
Compared with 1997, the changes in buffers are especially significant.
EME13's average external debt/exports ratio fell from 170.4% to 127.6%, foreign reserves/GDP rose from 8.9% to 18.5%, and current account deficit/GDP narrowed from 1.8% to 0.8%.
On one hand, the gap that needs to be filled by external funds has shrunk; on the other hand, the resources available to cope with capital outflows and external debt servicing have increased — a strong dollar is no longer simply "an emerging market problem" but rather "a US, Europe, and Japan problem."
However, this does not mean emerging market countries are without risk; further decomposition of EME broad vulnerability shows that pressure is not uniform across different economic factors.
From 2017 to 2024, government total debt, average inflation levels, and foreign exchange reserves sub-indicators still point to greater vulnerability, but bank credit levels, current account balances, and external debt scale have formed buffers.
Directly extrapolating the current Fed rate hike as a precursor to some kind of emerging market crisis ignores these real buffers and improvements in financial risk resistance.
Global fiscal deterioration is common, but the strengthening of financing constraints on core developed economies is the more noteworthy marginal change.
In summary, the US and Europe need to reassess their stability as the global interest rate benchmark, which is precisely the core meaning of "the US and Europe are replacing emerging markets as the source of financial risk."
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