Economists who assure us that advanced-economy debt is completely “safe” sound eerily like those who touted the “Great Moderation” – the supposedly permanent reduction in cyclical volatility – a generation ago. In many cases, they are the same people.

BUENOS AIRES – Are brewing exchange-rate and debt crises in Argentina and Turkey localized events without broader implications? Or are they early warning signs of deeper fragilities in bloated global debt markets that are being exposed as the US Federal Reserve continues to normalize interest rates?

Rising interest rates could test stability in some advanced economies as well, especially in Italy, where voters, particularly in the less developed south, have opted decisively for a disruptive populist government. With an economy ten times the size of Greece, a default in Italy would blow up the eurozone. Indeed, the populist coalition government that has now taken power has hinted that it wants write-offs for some of its under-the-table debts (not included in Italy’s official public debt of over 130% of GDP) to the euro system through the European Central Bank.

The good news is that a full-blown global debt crisis is still relatively unlikely to erupt. Even with a recent softening of European performance, the overall global economic picture remains strong, with most regions of the world still growing briskly. Although it is true that several emerging-market firms have piled up worrisome quantities of dollar-denominated external debt, many foreign central banks are brimming with dollar assets, especially in Asia.

The International Monetary Fund, moreover, has sufficient resources to handle a first wave of crises, even if it includes, say, Brazil. The main concern is not that the IMF will fail to deliver funds, but that it will make the same mistake it did in Greece, by not imposing a realistic deal on debtors and creditors. As for Italy, chances are that Europe will find a way to grant temporarily some of the extra budget slack the new government seeks, even if there is no way eurozone officials can allow high-debt Italy simply to destroy the common currency.

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