Debt (Part 1)
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A short primer on sovereign debt, the money that governments borrow (from each other, and from the markets):
Debt levels have continued to rise over decades; COVID-19 crisis expanded total indebtedness to a 50-year high, and the ongoing war badly hit the commodity importers. Over the next 12 months, as many as a dozen developing economies may not be able to service their debt (yup, like Sri Lanka).
The world has seen debt crises before. Latin American debt crisis in the 1980s. Another one in mid-1990s that led to the establishment of Heavily Indebted Poor Countries Initiative (HIPC). But the nature of public finance has changed in the last 30 years. How?
Thirty years ago, most foreign debt of developing countries was owed to other governments (bilateral creditors, mostly the “Paris Club”; yes, there is history to how the rich became rich but that’s an argument for another time). At the end of 2020, low- and middle-income economies owed five times as much to commercial creditors (and with variable interest rates) as they did to bilateral creditors.
This year, low-income countries need to pay about $53 billion to service their public- and publicly-guaranteed debt (of which only about 10 percent is somewhat cheaper, bilateral debt).
Is there a way out? Maybe. Something called the “Common Framework”. Happy googling.
Also, this could be a good read: http://wrld.bg/hvbM50Km2FH
