End the Sovereign Debt Trap (in the Global South)

Symbolic image: A human hand, drawn in thin lines, holds a net of threads in its hand

of Antonella Fraccaro

The transregional sovereign debt situation is a crisis of development that threatens to push the achievement of sustainable development, a just energy transition, and the guarantee of human rights too far into the future.

COVID-19 compelled states to intervene heavily in their national economies to guarantee healthcare and to sustain incomes. Subsidies and direct transfers led to significant debt increases, especially in countries with limited capacity to collect taxes. Now many countries in the Global South face severe social and economic challenges caused by high levels of debt.

More than half of low-income countries now have a high risk of debt distress or are actively in an insolvency or liquidity crisis. At least 45 developing countries spend more on debt interest payments than on health, and 19 spend more on interest than on education. Quality of life and human rights have been compromised. Following the pandemic, the baseline scenario for crisis has shifted. Polycrisis – multiple intersecting crises – is now the new normal, but that is not yet reflected in how debt sustainability is determined.

The movement to find solutions

Economic experts, civil society, trade unions, international organizations, and political decision-makers around the world are all working to find a new international debt management consensus that will relieve the burden on affected countries. Good initiatives abound – sovereign insolvency proceedings, reform of debt sustainability frameworks, even visions of a grand bargain among MDBs, private sector and national governments for debt relief and growth – these and more proposals are on the table. There is no need to reinvent the wheel!

However, a robust and inclusive approach to the problem – one that serves both low-income and middle-income countries, one that addresses the plight of countries facing insolvency as well as those facing illiquidity, one that addresses the complex landscape of lenders, and perhaps most importantly, one that takes not just an economic approach to the problem but that also deals with the complex politics – this kind of solution is not yet within reach.

Countries that find themselves in critical over-indebtedness or even default often face the challenges of such a situation alone. Governments must manage difficult negotiations with the international financial institutions and/or bilateral lenders, on both the private and public side, while at the same time trying to ensure that their citizens still trust in their ability to provide social protection and maintain social cohesion.

Focus on the role of parliaments and legislation

With a legally binding international sovereign debt workout mechanism out of reach, the debate on the potential of national legislation to support enforce the equal comparable treatment of creditors has gained new momentum. The aim is to make restructuring negotiations of critically unsustainably indebted states more successful and efficient by preventing uncooperative behavior of creditors. Based on a number of background papers and expert discussions examining experiences in both – creditor and indebted countries – the project is elaborating policy recommendations.

Our contribution

The Friedrich-Ebert-Stiftung is activating its global network of over 100 offices and partner organizations to help end the debt trap. Key FES offices are in critically indebted countries and regions. Others interface with the international financial organizations, the United Nations (UN), and multilateral groups like the G20 and BRICS. We want to influence the political and technical debates on how to strengthen and reform the international financial architecture, including how sovereign debt distress is handled.

We are establishing a international advisory group of esteemed experts and political practitioners to coordinate the debt discussion across regions, provide strategic advice to progressive political decision-makers in affected countries, and accompany the global decision-making process. This includes shaping discussions at the UN and IFIs, particularly the Summit of the Future in September 2024 and the fourth Financing for Development conference in 2025.

Our aim is to empower this group to consolidate the best approaches developed thus far, provide guidance to national governments and international institutions, and promote advocacy for just and politically feasible solutions that prioritize the well-being of people.

We are honored to have Martín Guzmán, former Minister of Economy of Argentina and current Professor at Columbia University's School of International and Public Affairs (SIPA), and Paola Subacchi, the incoming Chair in Sovereign Debt at Sciences Po and former Director of International Economics Research at Chatham House, as co-chairs of this esteemed group.