USA: Given the rise in inflation and interest rates, as well as the significant increase in geopolitical risk in 2022, it is a small miracle that there was no global systemic financial crisis.

However, with recession risks high and public and private debt reaching record highs during the now-gone era of ultra-low interest rates, the global financial system is facing a significant stress test. Managing the crisis in an advanced economy like Italy or Japan would be challenging.

It is true that tighter regulation has reduced risks to the core banking sector, but it has only resulted in risks moving to other parts of the financial system.

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For example, rising interest rates have put enormous pressure on private equity firms that borrow heavily to acquire real estate. Some of those businesses will most likely fail now that residential and commercial real estate are on the verge of a sharp, prolonged downturn.

In that case, the primary banks that provide most of the funding for real estate purchases by private equity firms could be held accountable.

Because firms with lighter regulations face less pressure to mark their books to market, which hasn't happened yet. But what if, despite the recession, interest rates remain very high? (As a distinct possibility as we exit the ultra-low-rate era). In that case massive payment defaults may make it difficult to maintain appearances.

The recent financial shock in the UK serves as an example of the uncertainties that can arise as global interest rates rise. The near-collapse of her country's bond markets and pension system was initially attributed to former prime minister Liz Truss, but it was actually pension fund managers who originally bet that long-term interest rates would rise too quickly. Will not grow

Japan may be the most severely vulnerable country in the world because its central bank has kept interest rates high for decades. The Bank of Japan, in addition to offering extremely low interest rates, is also engaged in yield curve control by capping five-year and ten-year bonds at near zero.

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Japan may finally leave its near-zero interest rate era, given the rise in real interest rates seen globally, the sharp depreciation of the yen and strong inflationary pressures.

With a debt to GDP ratio of 260%, higher interest rates would put immediate pressure on the Japanese government. If the BOJ's balance sheet were to be integrated, roughly half of the government debt purchased by the private sector would actually be short-maturity bonds. In a high-growth environment, a 2% interest rate hike would be manageable, but Japan's growth prospects are likely to deteriorate as long-term real interest rates continue to rise.

The massive government debt in Japan almost certainly limits the options available to policymakers for regulating long-term growth. However, given the taxing authority of the government and the potential for debt inflation, the issue should be manageable.

The real concern is that if inflation continues to rise and Japan's real interest rates approach US levels, unseen financial sector vulnerabilities could become exposed. Despite the fact that Japan's inflation expectations are currently much lower than those of the US, this has generally been the case over the past three decades.

The good news is that near-zero inflation expectations in Japan are well stable after nearly three decades of extremely low interest rates, although they could change if current inflationary pressures prove persistent.

The bad news is that given these conditions remain in place, some investors could be easily tricked into thinking that interest rates will not rise at all, or at least not significantly.

As it was in the UK before, betting on low interest rates may therefore be very common in Japan. In this case, further monetary tightening can blow things out of proportion, create instability and exacerbate the government's financial issues.

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Another example of latent risk is Italy. In many ways, the eurozone is held together by ultra-low interest rates. Open-ended guarantees for Italian debt were cheaper when Germany could borrow at zero or negative rates, in keeping with Mario Draghi's 2012 pledge to "do whatever it takes."

But a sharp hike in interest rates this year has changed that calculation. Germany's economy resembles that of the early 2000s, when some referred to it as the "sick man of Europe", and continues today. While ultra-low rates are still relatively new to Europe, you have to be concerned that, like in Japan, a sustained wave of monetary tightening could expose significant areas of vulnerability.