Debt Relief for Green and Inclusive Recovery – How to End the Global Debt Crisis
The debt crisis affects millions of people across the globe – and it’s getting worse.
When a person or company loses the ability to pay their debts, they go bankrupt. The same goes for governments. When a country’s debt load becomes too high, investors start to worry that it won’t be able to pay back what it has borrowed. This leads them to demand higher interest rates, making it harder and more expensive for the government to roll over existing loans or to secure new financing. When this cycle continues, it can lead to a debt crisis where the government is not able to service its existing debts.
At the end of 2021, low- and middle-income countries owed 61% of their external public debt to private creditors – a 15% increase on 2010. These payments siphon off money that could and should be invested in a country’s sustainable development and climate efforts.
These repayments are based on the financial decisions of a small group of people in rich countries who make policies that can affect the lives of billions of people – for example, restricting the flow of foreign investment, cutting aid, raising interest rates to combat inflation, or imposing austerity measures that lead to job losses and reductions in health care spending.
This is not just about the debt burdens of individual countries – the global system of debt finance needs to be changed. A new report, Debt Relief for Green and Inclusive Recovery, from the GDP Center, Heinrich Boll Foundation and SOAS Centre for Sustainable Finance, suggests an alternative model that moves away from the strict criteria required by the IMF and World Bank in order for a country to qualify for debt relief (such as reducing inflation and lifting price controls, allowing for greater competition and reduced trade restrictions, and downsizing the government). Instead, it proposes new incentives for private creditors to participate in this two-level game, and a more holistic approach to addressing sovereign debt crisis.
