The global debt crisis is a major challenge that needs to be addressed by governments and the international community. It threatens sustainable financing for development, climate change mitigation, and social protection. It also poses a significant risk to peace and security.
The 2008 financial crisis was the most severe in four decades and caused widespread disruption to economies and livelihoods. Millions lost their jobs and assets. Governments stepped in to stimulate demand and support economic activity, guarantee deposits and bank bonds, purchase ownership stakes in failing financial firms, and bail out the economy. Their efforts prevented a Great Depression but their policies slowed growth and recovery, reducing employment and wages. The effects on low income countries were particularly harsh.
Since the global financial crisis, external debt levels and service payments have exploded for many countries, especially those with the least developed economies. This has been fueled by a potent mix of factors, including the COVID-19 pandemic, Russia’s invasion of Ukraine, the strong US dollar and surging interest rates, and more frequent climate shocks like floods and droughts.
Some experts believe that the problem is mostly due to poor economic policy and development choices by borrowing countries. They argue that developing countries should have been more careful with their borrowing. Others believe that the problems stem from private creditors who lent to developing countries at high interest rates (up to 6-10%), even when they were lending to advanced economies like the US and UK at 0-1%.