Would Higher interest rates cool demand for borrowing

The global borrowing levels go beyond 2006 mark and the decision to raise base rates by the US Federal Reserve hopefully would cool down the demand for borrowing especially in the US. However, we may face the similar effect in 2007 and 2008. In 2007 and 2008, the mortgage default rate in the US increased after the US Fed raised its base rates, then the financial crisis hit the global economy.

Although the US based rates have been increased by the Fed, the borrowing costs for many firms do not increase significantly as many large firms have the ability to borrow in a global scale. It is now more expensive to borrow in the US, but in Europe and many other regions the interest rates stay the same and low, the costs of borrowing will not increase in these regions. Therefore, it is not likely to see an immediate increase in the default rates around the world as they have multiple borrowing channels.  However, the small businesses in the US will face borrowing difficulties and they may start to default and bankrupt. As the leverage ratios in these small businesses are relatively low, the increase in the default rates of small businesses is unlikely to create a significant shock in the economy and cause a crisis.

As long as the interest rates in Europe stay low, the borrowing levels will stay high as the large borrowers are multi-national companies who have the abilities from most regions around the world. Once the interest rates in Europe start to increase, I expect some large companies may start to default as even there will be some places that still have lower interest rates but do not have sufficient money to support large companies' borrowing. Thus a form of financial crisis may start to damage our economies. Such financial crisis will become the most serious financial crisis which is more damaging than the previous ones.

Once the financial crisis hit, the countries which have lower interest rates will not have monetary policies as a tool to stimulate their economies. Therefore, I think they probably should increase their rates before Europe, as I see Europe increasing interest rates as the trigger of the next financial crisis. Of course, I can be very wrong about such prediction.