As the world faces the prospect of the next global financial crisis, we need a clear-eyed view of the underlying issues. One of those is the skewed way we assess debt sustainability, ignoring that most low-income countries are insolvent and will need significant write-offs. Another is the rise in domestic debt, strangling domestic private-sector initiative and undermining sustainable development.
When a person or a business cannot repay their debts over time, they go bankrupt. The same can happen to nations, but the process is much more difficult.
While the GFC has so far averted a global depression, the effects have been devastating for many people and countries, with millions losing their jobs and their homes. It has also taken much longer for most economies to recover from the crisis than it did from previous recessions that were not triggered by financial crises.
One of the reasons for this is that debt repayments siphon resources away from vital investments in education, healthcare and infrastructure that would otherwise enable growth-boosting measures. This is a doom loop that weakens a country’s competitiveness, makes it harder to tackle poverty and prevents the long-term recovery needed for everyone on the planet.
To avoid the next global debt crisis, we need a new approach to how we assess debt sustainability and a clearer definition of what constitutes unsustainable levels of debt. We need a fairer and more transparent process that allows low-income countries to escape the doom loop, without being forced into costly and damaging economic reforms (like reducing inflation, reshaping their labour markets or removing price controls) in order to qualify for debt relief.