As we enter a new year, global economic growth seems to be stabilizing, inflation is receding and interest rates seem to have peaked. But these positive signs alone are unlikely to solve a debt crisis that has been more than a decade in the making. Over 3.4 billion people live in countries that spend more on debt payments than on health and education, which means that they are losing out on opportunities for prosperity.
The underlying cause of the crisis is that low-income countries borrowed too much at extortionate interest rates during and after the financial crash of 2008. This was often driven by fiscal imprudence, but also by the fact that private lenders (including hedge funds, banks and traders) saw an opportunity to make vast profits.
These unsustainable debt levels are now leaving countries unable to finance essential services or take actions to tackle climate change. In 2023, 54 low-income countries devoted at least 10% of their budgets to debt interest payments, a figure that has doubled over the last ten years.
But, unlike the debt crises that have plagued individuals and businesses, there is no procedure for countries to declare bankruptcy when they can’t pay their debts over time. Instead, the world’s creditors decide whether and when to demand repayment. And the landscape is even more crowded today, with an increasing number of bilateral and multilateral lenders, including China, India and petrostates. This crowded architecture makes tackling the global debt crisis simultaneously more urgent and more complex than in the 1980s.