NEW YORK – One of the COVID-19 pandemic’s many complex legacies will be a high level of public-sector debt in most countries. This reflects governments’ increased spending to tackle the crisis, as well as the collapse of tax revenues as economies imploded in 2020. As a result, many lower- and middle-income countries are at risk of sovereign-debt distress.
Although many developed countries are heavily indebted, their interest rates are low by historical standards – and negative in real terms. Developing countries, despite increasing their public spending less sharply during the COVID-19 crisis, must pay higher interest rates on their sovereign debt. These rates, and the risk spreads that poorer countries pay in international capital markets, may rise as interest rates in advanced economies – and the United States in particular – start to climb.
Shortly before the annual International Monetary Fund and World Bank meetings in October 2020, IMF Managing Director Kristalina Georgieva called for urgent reforms to the international debt architecture. But action has been quite limited.
True, the G20 launched the Debt Service Suspension Initiative for low-income countries at the pandemic’s onset, and extended and complemented it last November with a mechanism that allows these countries to renegotiate their debts on a case-by-case basis. But private-sector participation in this initiative has been limited, and nothing similar has been offered to middle-income countries (though some – notably Argentina and Ecuador – have been able to renegotiate their debts based on existing frameworks).
“Responding to Risks of COVID Debt Distress,” a recent report from the Friedrich Ebert Foundation New York bureau and the Consensus Building Institute, outlines the challenges facing developing countries. Drafted by a panel (including me) comprising former senior government officials, private attorneys, and academics who have studied sovereign-debt restructurings, it contains several key messages.
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