As the global economy began shutting down in March 2020, investors stampeded out of stock and bond markets in countries such as Kenya, Brazil, India and Thailand. The panicky exodus seemed to be a prelude to a wave of government debt defaults that would punish Wall Street and poorer nations alike.

But the financial disasters that many economists predicted for heavily indebted countries in the developing world never materialized. Instead, the Federal Reserve’s decision to lower interest rates to near zero, which helped avert a global depression, also encouraged portfolio managers to return to emerging markets where they could earn higher returns.

The resumption of private financial flows to Africa, Asia and Latin America staved off the anticipated wave of debt defaults and restructurings. But it did so at the cost of adding to an already swollen debt pile: Total emerging market borrowings topped $86 trillion at the end of March, up more than $11 trillion during the pandemic.

Further debt increases are inevitable as countries in the developing world struggle to repair their battered economies and to pay for coronavirus vaccines. International efforts to lighten the debt load thus far have achieved little, with private creditors and the Chinese government remaining on the sidelines.

Now, signs that the Federal Reserve may raise interest rates sooner than expected risk triggering a fresh bout of capital flight that could shake both emerging market borrowers and the U.S. economy.

“There’s just an enormous amount of debt out there. External financing to roll over that debt, right now, it’s abundant. But we all know how volatile capital flows can be,” Daleep Singh, U.S. deputy national security adviser, told a think tank last week.

For now, many emerging markets are enjoying some of the lowest lending costs on record, according to Oxford Economics. Ghana raised $3 billion in March by selling bonds to investors, including one “zero coupon” bond that pays no interest for four years. (Investors receive the face value of the bonds when they mature, after buying them at a discount, similar to the way U.S. Savings Bonds work.)

Fed policymakers last month raised their inflation forecast and said the central bank could hike rates in 2023, a year earlier than anticipated. Some Fed officials have expressed support for moving sooner to cool off rising prices, which could cause global financial flows to abruptly reverse course once more.

Higher U.S. rates would act as an incentive for fund managers to sell securities in emerging markets and invest the money in the United States. Countries that borrowed heavily during the pandemic would suffer a double whammy, paying higher interest charges on a larger stock of debt.

Since much of this borrowing is in dollars, these nations would be faced with a choice between two evils: Either raise their own interest rates to prevent capital from fleeing and to protect the value of their currency, which could cause a recession, or allow their currencies to sink and see the cost of repaying their dollar-based loans soar.

“That is bad, bad, really bad news for the emerging markets,” said Carmen Reinhart, chief economist for the World Bank.

Developing country debt will be on the agenda when the Group of 20 finance ministers and central bank chiefs meet in Venice July 9 to 10. The G-20 last year coordinated an agreement to suspend interest payments that poor countries owed government creditors. After being extended twice, that deal will expire at the end of the year and be replaced by a broader debt restructuring plan called the Common Framework.

“I don’t think we have expectations for major breakthroughs. They’re struggling with the details of implementation. I think it’s going to be a long haul,” said Scott Morris, a senior fellow at the Center for Global Development, which hosted Singh.

Last year’s debt service suspension initiative (DSSI) saved 43 struggling countries a modest total of $5.7 billion, which Reinhart called “disappointing.”

Developing countries this year are scheduled to pay $1.1 trillion in debt service costs, including $373 billion for public debt, according to the United Nations Development Program. Over the next three years, those interest charges will hamstring governments that should be spending to battle the pandemic as well as to address long-term problems, such as the effects of climate change, the agency said.

Interest payments already eat up an enormous share of government budgets in some developing countries, leaving little money for education and health. In Lebanon, Sri Lanka and Zambia, close to half of government revenue is siphoned off by creditors, according to World Bank data.

As the Fed and other major central banks begin raising rates, some emerging market central banks would be forced to follow suit. Otherwise, capital would flee and their currencies would plunge in value, further aggravating inflation.

“You could have a crisis if investors all decide to run for the exits at the same time,” said Douglas Rediker, chairman of International Capital Strategies, an investment advisory firm.

If the dollar follows U.S. interest rates higher, some emerging markets’ credit ratings would probably also be cut, raising their borrowing costs and potentially making financial bailouts necessary, Agustin Carstens, general manager of the Bank for International Settlements in Basel, Switzerland, said in a recent speech.

Central banks in Brazil, Mexico, Russia and Turkey already have hiked interest rates in response to localized inflation caused by weakening currencies and rising commodity prices.

“This is something the IMF and World Bank really need to watch vigilantly because these things can turn quickly,” said Brent McIntosh, former undersecretary of the treasury for international affairs and now an adjunct senior fellow at the Council on Foreign Relations.

As the debt load grows in the developing world, additional risks are appearing. Of total developing country borrowing during the pandemic, 60 percent has ended up on the balance sheet of local banks, which Geoffrey Okamoto, the International Monetary Fund’s first deputy managing director, labeled “concerning.”

That financial link means that a debt default or restructuring could punch a hole in a nation’s financial system at the same time it upends the government budget, raising the risk of a more destabilizing crisis.

Trouble for emerging markets ultimately could boomerang on the U.S. economy, the Federal Reserve warned in its most recent financial stability report. Bank finances could be damaged if corporations and governments in the developing world default on loans or American clients with significant exposure to such countries lose business.

So far, the G-20’s efforts to ease the developing economies’ mounting debts have satisfied few.

Last year’s DSSI helped countries such as Pakistan, Afghanistan, Angola and Uzbekistan by deferring interest payments.

But the effort failed to secure sufficient participation from bondholders, who have supplanted commercial banks as the largest source of private capital for emerging economies. And it received only limited backing from China, now the world’s top government lender. Many eligible countries also were reluctant to participate, fearing that they would subsequently lose their access to private capital markets.

In November, the G-20 agreed to replace the DSSI with the Common Framework, intended to enable up to 73 low-income countries to reduce what they owe in return for agreeing with the IMF on an economic reform plan that would position them to meet future bills.

Three nations — Chad, Ethiopia and Zambia — already have requested debt restructurings under the new arrangement. The Biden administration is willing to allow other, slightly more affluent, countries with debt problems to participate, though the G-20 has yet to consider that possibility, according to a senior U.S. Treasury Department official, who briefed reporters on the condition of anonymity.

Clay Lowery, executive vice president of the Institute of International Finance, an industry group, said banks are “more likely” to participate in the new program.

The framework, however, is likely to be dogged by the same questions that bedeviled the DSSI, independent analysts said.

Any effort to overhaul developing countries’ debt must make sure that official creditors, such as the U.S. government and the IMF, and Wall Street fund managers who buy emerging market bonds in the financial markets are all part of the same bargain.

“The real risk right now is that whatever liquidity we provide countries to manage the crisis, some of it is going toward paying creditors and allowing private creditors to continue to free ride, which is a really bad situation,” said Lars Jensen, an economist with the UNDP.

China’s role may be even more vexing. Beijing has signed on to the new G-20 plan, but U.S. officials say it needs to do much more.

“Despite China’s public support for the Common Framework, its participation has been sorely lacking,” Singh, the deputy national security adviser, said last week. “China’s lending activity remains highly opaque and it self-classifies a lot of its lending as commercially driven, even though it’s very clearly directed by the government.”

Indeed, one Chinese institution, the China Development Bank, is a major lender across Africa. Chinese officials insist the CDB is akin to a private-sector lender, but the bank operates “under the direct leadership of the State Council of China,” its website says, referring to the government’s senior policymaking body.

More than 70 percent of the bank’s shares are owned by the Chinese Ministry of Finance and a state-backed investment company.