The World Is Going Bust: What Is the Sovereign Debt Crisis and Can We Solve It? (2024)

Whenever a new American debt emergency rolls around, it tends to be predictable: doomsaying politicians trade barbs and brinksmanship until they find a way to kick the problem down the road. The debt ceiling gets raised, some spending gets added or subtracted, the nation continues paying its loan interest, and life goes on.

But these periodic moments of borrower’s remorse have nothing on the peril posed by the global sovereign debt crisis. According to the International Monetary Fund (IMF), 70 countries are at risk of debt distress—meaning they might default on their loans. That’s more than a third of all countries in the world. Some nations have already tumbled into trouble: Lebanon, Russia, Sri Lanka, Suriname, and Zambia have all defaulted. When Sri Lanka skipped payments, its economy crashed, protesters stormed the presidential palace, and the country’s leader was forced from power. Rebeca Grynspan, the secretary-general of the United Nations Conference on Trade and Development, has called the debt crisis one of “the biggest threats to global peace and security.”

“The impact has been catastrophic,” says Kevin P. Gallagher, director of the Boston University Global Development Policy (GDP) Center. “We’ve already seen over 100 million people go back into poverty and many countries facing a lost decade, because they have to make a daily trade-off: education or servicing debts, healthcare or servicing debts? It’s having devastating effects on countries and it’s going to impact the rest of the world.”

Gallagher is the coauthor of a new plan to help the world dig itself out of the crisis—and avoid future ones. “Debt Relief for a Green and Inclusive Recovery: Guaranteeing Sustainable Development” crunches the numbers on the debt crisis to expose the true depth of the problem, then proposes steps the international community can take to help struggling countries. The report outlines how creditors can grant significant debt reductions—between $317 billion to $520 billion—and how the remaining loans can be restructured to help countries transition to sustainable, low-carbon economies. According to Gallagher, its ideas are already gaining momentum and featured at a recent global climate finance summit hosted in Paris by French President Emmanuel Macron and Barbados Prime Minister Mia Mottley.

“We’ve seen a lot of movement happen,” says Rishikesh Ram Bhandary, assistant director of the GDP Center’s Global Economic Governance Initiative and a coauthor of the report. One factor focusing international attention is that, until the debt crisis is under control, climate resiliency projects will stagnate from lack of local funding. “If you want the world to be moving together in lockstep to address climate change, for example, then we really have to figure out how to address the debt crisis.”

What Is the Global Sovereign Debt Crisis? An Explainer

Just about every country has debt: governments take loans to pay for new roads and hospitals, to keep economies ticking over when recessions hit or tax revenues fall. Sometimes they borrow from countries, other times banks, or maybe asset managers—companies like those investing your pension dollars. But, just like private borrowers, they can get in over their heads: whether they borrow too much, their income falls, they need cash for emergency repairs, or they get buffeted by rising interest rates, they suddenly lack the funds to service the loan.

And that’s been happening a lot recently. In their report, the BU researchers calculate that “external debt levels and service payments have more than doubled since the 2008 global financial crisis, with climate vulnerable nations among the most exposed.” They estimate emerging markets and developing economies’ debt grew from $1.3 trillion to $3.6 trillion between 2008 and 2021. Gallagher points to a potent mix of factors that have swirled together to bring about the current emergency: the COVID-19 pandemic, Russia’s invasion of Ukraine, rising US interest rates, and more frequent climate disasters like floods and droughts. On their own, each one of those could be financially ruinous, but together?

“It’s a crisis of multiple shocks,” says Bhandary, who—along with Gallagher—is a member of the Task Force on Climate, Development and the International Monetary Fund. “Countries are confronting a very expensive situation; it’s really gotten untenable for many.”

Despite having one of Africa’s largest economies, Nigeria is among those teetering on the brink. It’s on the hook for nearly $100 billion—23 percent of its gross domestic product. That might seem insignificant compared to the towering $32.48 trillion US national debt, but the West African nation is spending 96 percent of government revenue on servicing its loans. By contrast, about 7 percent of federal US spending goes toward debt payments.

“The debt crisis is effectively a development crisis,” says Bhandary. Many of the countries in financial dire straits are those that should instead be pushing forward on the UN’s Sustainable Development Goals, lifting their people out of poverty, ending hunger, improving health. “The more we postpone [addressing debt issues], the more severe the debt crisis is going to be—it’s going to be a development crisis and it’s going to be a climate crisis, because we’re not going to be making investments. That’s all very tightly interlinked.”

How to Avoid Another Debt Crisis—and Help Save the Planet

The global community does have a plan for dealing with the crisis: the G20 Common Framework, which lays out steps countries can follow to appeal for help with unsustainable debts. But Gallagher says it’s not working, arguing it’s hobbled by a couple of critical flaws: not every country can use it (Sri Lanka, for example, was considered too well off to qualify); it doesn’t have a way to get all creditors, especially private ones and those beyond the G20 countries, to the negotiating table; and the debt relief, he says, is “really just how can we get a country back to the anemic levels of spending and revenue mobilization they had in 2019.”

Instead, the “Debt Relief for a Green and Inclusive Recovery” plan is “really about letting everybody in, creating incentives for all creditors, and linking the debt relief to social and environmental goals,” says Gallagher, “not just turning the lights back on.”

The report was produced for the Debt Relief for Green and Inclusive Recovery Project, a collaboration between the GDP Center, the Germany-based Heinrich Böll foundation, and the SOAS Centre for Sustainable Finance, University of London, United Kingdom. It proposes doing away with qualifying cutoffs for countries in distress—if they’re about to default, the researchers say, they should get help. They’ve also come up with a series of sticks and carrots to include all creditors in debt relief and restructuring.

“Right now, the bondholders in New York don’t want to get involved,” says Gallagher, “because they say, ‘Well, if we give relief to Suriname and China doesn’t, then they’ll take the money from us and pay China.’ And China says the same thing.”

Under the proposed plan, a debt-distressed country’s creditors would be forced to the table with a suspension of all debt payments and then compelled to give what the researchers call debt haircuts—reductions of the amount owed. But their participation would also be incentivized with a new guarantee facility administered by the World Bank—a promise that even if a country can’t pay them back, someone will. If a country defaults, the existing bonds—a government’s promise to pay back a loan—are thrown out and replaced with new, higher-grade bonds underwritten by the guarantee facility. They’d also come with natural disaster clauses.

“If you’re an island state in the Caribbean and you get hit by a cyclone, that should be the focus of your public money,” says Bhandary. “There should be an inbuilt trigger that says you don’t have to service your debt for a certain number of years.”

A key part of the plan is encouraging countries to use the new fiscal and borrowing room the debt relief brings to focus on social and environmental investments.

In addition to its report being a topic of discussion at the recent Paris summit, the GDP Center has been talking to Brazilian policymakers about its findings and proposals—the country will assume the presidency of the G20 later this year.

“It’s not every day that someone writes an academic paper and you see it cited by declarations and communiques, but we’re proud that we’ve been able to contribute in this way,” says Gallagher. “It’s really us living up to our center’s mandate, to say, ‘What is a nonpartisan, empirically based, theoretically driven way of dealing with this, that doesn’t take a side with bondholders or governments?’ Hopefully, it can help the policy discourse and turn into policy change.”

This work was supported by Open Society Foundations and the Rockefeller Brothers Fund.