In an era of ultra-low interest rates, countries piled up debt on unsustainable terms. Some now face insolvency and unpayable interest repayments, while others’ growth and financial stability are held hostage to a rapidly rising debt-to-GDP ratio. This global debt crisis has reached alarming levels for many of the world’s poorest countries.
A global debt crisis is a threat to economic and social well-being worldwide, especially for the 3.4 billion people who live in developing countries. It’s also a threat to international peace and security as political instability and regional conflicts are fuelled by high interest rates and increasing financial vulnerability.
The current system of assessing the sustainability of countries’ debt is outdated and needs to be upgraded. It is too quick to decide that a country merely needs loans to tide it over, ignoring the fact that most low-income countries are insolvent and require substantial write-offs. It is also strangling domestic private-sector initiative, which holds back growth and poverty reduction.
Today’s crowded credit architecture is more densely populated than in the 1980s, with a mix of traditional multilateral and bilateral lenders as well as China, India, petrostates and vulture funds. This makes coordination, overcoming deadlocks and bringing relevant actors to the table more difficult. And it explains why the debt crisis is both more urgent and more complicated than in the past.