Interest rates surged as nations tried to slow the outflows of capital, bringing economic growth to a halt. Whether in the private sector or government, a debt crisis in one country can and frequently does spread economic pain to other countries. Capital flight includes an exodus of capital from a nation, usually during political or economic instability, currency devaluation or capital controls. So when an international debt crisis begins, banks often lose large sums of money, which the banks attempt to recoup by raising loan interest rates and lowering deposit rates. In 1998, real per capita gross domestic product fell by 16% in Indonesia, 12% in Thailand, and 8% in South Korea. If the current crisis gets much worse, then the government debt and currency that they hold will fall in value, which could undermine their own financial well being. This is especially true if the country in crisis is large and intricately linked to the global economy. Debt accumulation in some eurozone members was in part due to macroeconomic differences among eurozone member states prior to the adoption of the euro. It might take long for the end and the break of Lithuanian stock market downturn. Investopedia uses cookies to provide you with a great user experience. If a country's debt crisis is severe enough, it could result in a sharp economic slowdown at home that drags on growth elsewhere. Even in a small country, a debt crisis can have devastating effects elsewhere if that country is enmeshed in the global financial system and economy. The answer … One can foresee a post-coronavirus global economy marked by higher levels of public and private debt, acceleration in digitization processes, and less globalization. This has a negative effect on the wider economy. It’s the currency of seventeen nations. It would resemble the financial crisis of 2007 and 2008 (in truth, it could be much worse than that). 1 The crisis started in 2009 when the world first realized that Greece could default on its debt. Following the policies to reduce and He is also the author of British Politics For Dummies and The British Citizenship Test For Dummies. The Greek economy had already been struggling since the 1980s (due to risky financial ventures by its government) and the ‘Global Financial Crisis’ of 2007 had far-reaching effects on that country. Global trade has rise was in depression and the average annual trade growth was reduced by 1.14%. Financial losses, market turmoil, and sharp slowdowns in trade and economic growth are some of the ways countries can feel the effects of a debt crisis in another country. Besides daily activities, these people use the Euro to buy goods and services from overseas — if there was a collapse in its value, then they would be less able to buy imports. Banks around the globe have invested in the government debt of Eurozone countries. Prime Minister Cameron answered questions on the impact the European debt crisis has had on the British economy. International Effects Foreign banks are major bondholders. To protect the world financial system. After identifying 18 key exogenous crisis events, I analyse the impact on equity returns, exchange rates and government bond yields in 12 advanced and 13 emerging countries. If the Eurozone fragments and the value of the Euro collapses, these African countries will see the value of currency collapse too. A collapse of the Euro or a situation where some European governments would be unable to repay their debt would have a huge, negative impact on the world economy. 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