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Another Global Debt Crisis
When multiple crises confront global leaders, some yet-brewing ones tend to be ignored. One such is an(other) imminent external debt crisis in developing countries, which, as in the case of the COVID-19 crisis, is likely to be prolonged with long-term spillovers. However, while most observers admit that another external debt crisis is imminent, a commitment to find a lasting solution is absent. Not because the elements of such a solution are not obvious. With the COVID-19 pandemic and the Ukraine invasion having made this round of the debt crisis even more difficult to resolve, there is little option but to resort to a package that includes official debt write-offs, large private creditor haircuts and the channelling of cheap liquidity to less developed countries through mechanisms like enhanced Special Drawing Rights issues.
The world is on the verge of another external debt crisis in its less developed periphery. A growing number of countries stretching from Sri Lanka in South Asia to Ghana, Zambia and Tunisia in Africa, and El Salvador and Argentina in Latin America have either defaulted on debt service payments or are on the verge of default. While the world has been there before, the global financial crisis (GFC), the fallout of the COVID-19 pandemic, and the ripples created by the Russian invasion of Ukraine have aggravated this crisis. The International Monetary Fund (IMF) estimates that about 30% of emerging markets and 60% of low-income countries are now in or at high risk of debt distress (Georgieva and Pazarbasionglu 2021). While the situation in each country has its idiosyncratic features, there are many common elements in terms of both external influences and internal developments.
The signs of the onset are too visible to be missed: yields on sovereign foreign currency bonds issued by governments in these countries rule at high double-digit levels and have been rising. According to data from Bloomberg, yields on 10-year foreign currency bonds have, over the last year, risen between 15 and 20 percentage points in the case of Egypt, Ecuador, Nigeria, Kenya, and Pakistan, and between 20 and 40 percentage points in Ghana, Argentina, Sri Lanka, and El Salvador (Wheatly and Asgari 2022). Yet they are finding few buyers. Few expect most distressed debt to be repaid in full. And the crisis is spreading fast, is increasingly widespread and near-synchronised across countries.
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