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

BU’s Global Development Policy Center has released a plan to save nations from what a UN secretary-general has called one of “the biggest threats to global peace” and help them build back more sustainably

The World Is Going Bust: What Is the Sovereign Debt Crisis and Can We Solve It? (1)

Global Debt Crisis

BU’s Global Development Policy Center has released a plan to save nations from what a UN secretary-general has called one of “the biggest threats to global peace”

In 2022, Sri Lanka’s debt and economic troubles spilled into the streets as protesters stormed the prime minister’s office demanding change. Photo by Rafiq Maqbool via AP

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.”

The World Is Going Bust: What Is the Sovereign Debt Crisis and Can We Solve It? (2)

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.”

Some Americans might wonder why they should care about the financial well-being of Suriname or Sri Lanka. Gallagher says what’s happening on the world stage may soon impact pocketbooks closer to home. If countries are using every cent they earn to pay off debts, they’re not buying American goods and services; if they default, they’re not paying back American banks and creditors. He says BU has even lost some international students—from Africa and the Caribbean—who’ve been forced to return home when their domestic currencies stumbled. And, he adds, standing on the sidelines watching the crisis unfold would only hurt the US’ international legitimacy. If America doesn’t help, other nations—think China—might.

“If we don’t act globally, not only will it affect us materially, it could affect our standing,” says Gallagher, who’s also a BU Frederick S. Pardee School of Global Studies professor of global development policy. “That could have material implications in the longer term and really shake up the way the international governance system is set up.”

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.”

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. 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.

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

FAQs

How can we solve the US debt crisis? ›

An important way to tackle America's debt problem is to devolve a large part of federal spending to the states, allowing them to fund it themselves. The federal government spends more than $1 trillion a year on state and local activities such as education, housing, and transportation.

What happens in the sovereign debt crisis? ›

Key Takeaways. Sovereign default is the failure by a country's government to pay its debt. Sovereign default inevitably slows the nation's economic growth and hampers investment from overseas. Overwhelming debt is the main cause of sovereign default.

What are some possible solutions to the international debt crisis? ›

Very likely, a resolution of the debt crisis would end with the debtor countries financed through long-term capital- bonds, equity, direct investment, and perhaps some forms of long-term indexed debt-rather than floating rate liabilities whose terms can change overnight.

Will the US have a debt crisis? ›

A debt crisis is not imminent in 2024, but one will occur in the future if the nation's addiction to deficits and debt persists.

Why can't the US pay off its debt? ›

One of the main culprits is consistently overspending. When the federal government spends more than its budget, it creates a deficit. In the fiscal year of 2023, it spent about $381 billion more than it collected in revenues.

How does the US survive with so much debt? ›

The National Debt Explained

money from federal income tax), a budget deficit results. To pay for this deficit, the federal government borrows money by selling marketable securities such as Treasury bonds , bills , notes , floating rate notes , and Treasury inflation-protected securities (TIPS) .

Who owns the most US sovereign debt? ›

Nearly half of all US foreign-owned debt comes from five countries. All values are adjusted to 2023 dollars. As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).

Who owns US sovereign debt? ›

There are two kinds of national debt: intragovernmental and public. Intragovernmental is debt held by the Federal Reserve and Social Security and other government agencies. Public debt is held by the public: individual investors, institutions, foreign governments.

Who does the US owe money to? ›

In total, other territories hold about $7.4 trillion in U.S. debt. Japan owns the most at $1.1 trillion, followed by China, with $859 billion, and the United Kingdom at $668 billion. In isolation, this $7.4 trillion amount is a lot, said Scott Morris, a senior fellow at the Center for Global Development.

What caused the sovereign debt crisis? ›

The debt crisis was preceded by—and, to some degree, precipitated by—the global financial downturn that soured economies throughout 2008–09. When the “housing bubble” burst in the United States in 2007, banks around the world found themselves awash in “toxic” debt.

What is the sovereign debt in 2024? ›

Key Takeaways. We estimate sovereigns' long-term borrowing will reach $11.5 trillion in 2024, more than 50% above the pre-pandemic-levels, amid softer GDP growth, the heavy election schedule, elevated interest, and defense spending.

Why is every country in debt? ›

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.

How much does China owe to the US? ›

The United States pays interest on approximately $850 billion in debt held by the People's Republic of China.

What country has the highest debt? ›

At the top is Japan, whose national debt has remained above 100% of its GDP for two decades, reaching 255% in 2023.

Why is the US so heavily in debt? ›

Nearly every year, the government spends more than it collects in taxes and other revenue, resulting in a deficit. (The debt ceiling, set by Congress, caps how much the U.S. can borrow to pay for its remaining bills.) The national debt, now at a historic high, is the buildup of its deficits over time.

What would happen if the US printed enough money to cover all the debts? ›

People buy government because they assume a government bond is a safe investment. However, this assumes that inflation will remain low. If governments print money to pay off the national debt, inflation could rise. This increase in inflation would reduce the value of bonds.

Who does the US borrow money from? ›

Federal Borrowing

The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government.

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