Instead of an explicit default, governments often employ 'financial repression.' This strategy, a 'soft default,' involves policies that lead to inflation, steadily eroding the purchasing power of citizens' savings and effectively stealing their economic value to manage national debt.

EM corporate credit has been highly resilient to external pressures like rising US Treasury yields, with spreads reaching 15-year tights. However, the asset class is not immune to stress. The primary source of recent defaults has been high local interest rates in specific countries, such as Brazil, rather than global factors.

When national debt grows too large, an economy enters "fiscal dominance." The central bank loses its ability to manage the economy, as raising rates causes hyperinflation to cover debt payments while lowering them creates massive asset bubbles, leaving no good options.

While current bond yields resemble pre-2008 historical norms, the fiscal landscape is radically different. Governments now carry much larger debt burdens from the pandemic and other spending. This makes the cost of servicing this debt at historically 'normal' rates a significant and unresolved challenge for the global economy, distinguishing this era from previous ones.

Investor Ray Dalio explains that national debt reaches a crisis point not because of its size, but when two things happen: debt payments squeeze out essential spending, and low demand for new debt forces central banks to print money to buy it, thus devaluing the currency.

History shows a strong correlation between extreme national debt and societal breakdown. Countries that sustain a debt-to-GDP ratio over 130% for an extended period (e.g., 18 months) tend to tear themselves apart through civil war or revolution, not external attack.

When a government's deficit spending forces it to borrow new money simply to cover the interest on existing debt, it enters a self-perpetuating "debt death spiral." This weakens the nation's financial position until it either defaults or is forced to make brutal, unpopular cuts, risking internal turmoil.

Governments with high debt cannot simultaneously keep yields low, maintain a strong currency, and avoid austerity. Guest Alberto Gallo argues one of these pillars must break, with currency debasement being the most likely initial outcome, followed by a potential credit market crisis.

High debt and deficits limit policymakers' options. Central banks may face pressure to absorb government debt issuance, which conflicts with the goal of raising interest rates to curb inflation, leading to a new era of "fiscal dominance."