Sri Lanka was the first country to stop paying its foreign bondholders this year, weighed down by high food and fuel costs that have fuelled protests and political chaos. Russia followed suit, but this is more of a technical default, many countries would like to have the Kremlin’s debt ratio.

Now, attention is turning to El Salvador, Ghana, Egypt, Tunisia or Pakistan, very vulnerable countries. As the cost of insuring emerging market debt against default has risen to its highest level since Russia invaded Ukraine, it’s time to sound the alarm.

The number of emerging markets whose sovereign debt is trading at distressed levels, anticipating a default, has more than doubled in the past six months. These 19 nations have a population of over 900 million people, with a debt of $237 billion, or 17% of total emerging market debt denominated in foreign currencies.

And as crises have repeatedly shown over the past decades, the financial collapse of a government can create a domino effect, like the Latin American debt crisis of the 1980s. The sudden and sharp increase in US rates in an effort to curb inflation has caused a surge in the value of the dollar, which makes it difficult for developing countries to service their foreign obligations. Added to this is an increase in agricultural commodities, energy costs, and growing difficulty in the supply of certain goods.

Episodes of political unrest have occurred around the world due to soaring food and energy prices, casting a shadow over upcoming bond payments in highly indebted countries like Ghana and Egypt, see Turkey. With the Russian-Ukrainian war keeping commodity prices under pressure, global interest rates rising, and the US dollar asserting its strength, the burden for some nations is likely to be intolerable. Unfortunately, things should get worse in the second half. In June, foreign funds withdrew $4 billion worth of emerging market bonds and stocks. The Exodus should continue.

Populations suffering from high food prices and supply shortages can be a powder keg for political instability. Political instability in key countries such as Egypt, Pakistan, or Turkey is likely to create major geopolitical shock waves for developed economies. Egypt, for example, has nearly $4 billion in external debt due in November 2022 and another $3 billion in February 2023. Pakistan has just resumed talks with the IMF as it runs out of dollars for at minus $41 billion in debt repayments over the next 12 months. In Ukraine, the war-ravaged country’s financing options are in danger of running out, as Occidentals having to manage their own financial worries are becoming increasingly discreet on the subject. Ukraine has also indicated that it needs $60-65 billion this year to meet financing needs. The nation also unveiled a longer-term reconstruction plan that could top $750 billion. Like what happened in Libya, Syria, Iraq, or Afghanistan, Westerners would discreetly abandon ship.

Yet, a major default could result in an emerging crisis at the worst of times and lead to political instability in several key countries around the world. This is bound to have major consequences within developed economies struggling with rising inflation and dying growth.