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What role do international financial markets play in the global debt crisis?

International financial markets play a crucial role in the global debt crisis by influencing borrowing costs and debt sustainability.

International financial markets are a platform where borrowers and lenders from different countries come together to trade financial assets such as bonds, shares, currencies, etc. These markets play a significant role in the global debt crisis, primarily through their impact on borrowing costs and debt sustainability.

The cost of borrowing for a country is determined by the interest rate it has to pay on its debt. This interest rate is influenced by the perceptions of international financial markets about the country's ability to repay its debt. If markets perceive a high risk of default, they demand a higher interest rate to compensate for this risk. This can lead to a vicious cycle where high interest rates increase the debt burden, which in turn increases the risk of default and pushes up interest rates even further. This was seen in the Eurozone debt crisis, where countries like Greece, Ireland, and Portugal faced soaring borrowing costs.

International financial markets also play a role in determining the sustainability of a country's debt. Debt sustainability refers to a country's ability to maintain its debt at a manageable level. If markets perceive that a country's debt is unsustainable, they may refuse to lend to that country or demand prohibitively high interest rates. This can trigger a debt crisis, as the country struggles to roll over its existing debt and meet its repayment obligations.

Moreover, international financial markets can exacerbate a debt crisis through contagion effects. If a country defaults on its debt, it can cause a loss of confidence in other countries with similar economic conditions, leading to a rise in their borrowing costs. This can spread the debt crisis to other countries, as was seen in the Asian financial crisis of 1997-98.

However, international financial markets can also play a positive role in resolving a debt crisis. They can provide much-needed liquidity to countries in crisis, helping them to stabilise their economies and restore market confidence. They can also facilitate debt restructuring, where the terms of a country's debt are modified to make it more manageable.

In conclusion, international financial markets play a pivotal role in the global debt crisis. They influence the cost of borrowing and the sustainability of debt, and can either exacerbate or help resolve a debt crisis. Understanding their role is crucial for managing and preventing debt crises.

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