End the Sovereign Debt Trap

Symbolbild: Eine menschliche Hand, gezeichnet in dünnen Strichen hält ein Netz aus Fäden inder Hand

von Anton Fraccaro

The sovereign debt trap in the Global South

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.

Contact
FES-Team

New York Office

Sara Burke (Project Coordinator)
sburke(at)fesny.org

Lennart Inklaar
linklaar(at)fesny.org

Berlin Office

Sarah Ganter
030 26935-7430,
Sarah.Ganter(at)fes.de

Katrien Klüver
030 26935-7417,
Katrien.Kluever(at)fes.de

Imène Cherif, Tunisia
Imene.Cherif(at)fes.de

Thomas Claes (Africa Dep.)
Thomas.Claes(at)fes.de

Abdulla Dayo, Pakistan
Abdullah.Dayo(at)fes.de

Amanuel Desalegne
AU Cooperation, Ethiopia
Amanuel.Desalegne(at)fes.de

Maria Julia Eliosoff, Argentina
MariaJulia.Eliosoff(at)fes.de

Gustavo Endara, Ecuador
gendara(at)fes-ecuador.org

Alexander Geiger
AU Cooperation, Ethiopia
alexander.geiger(at)fes.de

Constantin Groll, Ecuador
cgroll(at)fes-ecuador.org

Martin Güttler, Ghana
Martin.Guettler(at)fes.de

Niels Hegewisch (Asia Dep.)
Niels.Hegewisch(at)fes.de

Hendrik Johannemann
(Asia Dep.)
Hendrik.Johannemann@fes.de

Fritz Kopsieker, Zambia
fritz.kopsieker(at)fes-zambia.org

Martin Mader (Asia Dep.)
Martin.Mader(at)fes.de

Kathrin Meissner, TUCC, South Africa
Kathrin.Meissner(at)fes.de

Salam Said, Tunisia
Salam.Said(at)fes.de

Our Experts

Ali Salem Fayyad

Partners-Jordan, Center for Civic Collaboration, Jordan

Executive Director at Partners Jordan, specializing in governance and community engagement with over 11 years of expertise. He plays a key role in the Open Budget Survey in Jordan, enhancing public budget transparency and accountability. Ali has led projects in inclusive education, Democracy, and participatory budgeting, and his expertise includes local administration, and development, advocacy, training, social accountability, governance, and anti-corruption.

Andrés Chiriboga

SciencesPo, France

LinkedIn
@AndresChiriEC (X)

Ecuadorian economic sociologist. Member of the Monetary and Financial Regulation Committee of Ecuador (2015-2016). Adjunct professor and researcher at SciencesPo. Member of the Observatory on Market Polarization (AxPo) and the Centre de Recherche sur les Inégalités Sociales (CRIS). Founding member of the Dollarization Observatory of Ecuador. Coordinator of the Debtors' Clubs Project at Polylat

Betty Wainaina

New York University Center on International Cooperation, USA

LinkedIn
@BettyNyamburaW1 (X)

Betty Nyambura Wainaina is the Associate Director, Multilateral Reform at the New York University’s Center on International Cooperation, working on promoting and defending multilateralism, rethinking multilateral policy approaches and financing in fragile, conflict and violence contexts and strengthening collaboration between the UN and IFIs.

Francisco J. Cantamutto

Universidad Nacional del Sur, Argentina

Economist and Doctor of Research in Social Sciences. He currently works as Associate Researcher of CONICET, at the Institute of Economic and Social Research of the South (UNS-CONICET). Also teaches at the Economics Department of the National University of the South (UNS). Member of the Society of Critical Economy Society of Argentina and Uruguay (SEC) and of the Fiscal Work Space for Equity (ETFE).

Juan Pablo Bohoslavsky

Argentina’s National Scientific and Technical Research Council (CONICET), Argentina

He holds a Master's degree in Business Law and a PhD in Law. He defended the Argentine State in international arbitrations, participated in the nationalization of the national water supply company (AySA) and was its director representing the national State. He worked as Debt Officer at UNCTAD and was Independent Expert on debt and human rights of the UN. He has been a consultant for ECLAC, OHCHR, UNDP and human rights organizations. His research focus lies on the interlinks between finance and human rights.

Marina Zucker-Marques

Boston University Global Development Center, USA

LinkedIn
@MarinaZucker (X)

Senior Academic Researcher for the Global Economic Governance Initiative (Boston University Global Development Policy Center) and serves as Team Lead for the Financial Stability workstream. Previously, she worked at the United Nations Conference on Trade and Development (UNCTAD) in the Debt and Development Finance Branch. Marina holds a PhD from Freie Universität Berlin.

Martin Guzman

Universidad Nacional de La Plata (UNLP), Argentina

Business School (Columbia University), USA

@Martin_M_Guzman (X)

He was Minister of Economy of the Argentine Republic (12/2019 – 7/2022). He holds a PhD in Economics from Brown University. He is a researcher at the Business School (Columbia University) and co-chairs the Initiative for Policy Dialogue with Joseph Stiglitz (Columbia University). He is a Full Professor of Money, Credit, and Banking at UNLP (National University of La Plata). He directs the Public Debt Restructuring Program at the Initiative for Policy Dialogue. He is a member of the Pontifical Academy of Social Sciences in the Vatican and of the ICRICT. He was named a Young Global Leader by the World Economic Forum.