“A devastating catastrophe”, in the words of the Secretary General of the United Nations, António Guterres. The world public debt broke another ceiling. It reached 82 billion euros in 2022. It exceeds all the wealth that is produced in a year in the US, China, the EU and Japan, according to the latest from Unctad (United Nations Conference on Trade and Development) entitled A world of debt. The need to fight the pandemic, the rising cost of living and the challenge of climate change have forced all states to borrow more money from the public.
But this growth has been on the rise for twenty years. If the world GDP has multiplied by three since 2002, the debt has done so by five. “Debt is a trap into which it is very easy to fall, but from which it is very difficult to get out,” wrote George Bernard Shaw. There are now 52 economies in the world that are stuck in the ditch.
“Debt itself is not bad. It is one more tool. But in developing countries this money mobilizes few resources because it has increased its financial burden and has become an obstacle. And if they do not develop, this debt will not be able to be paid”, explains Daniel Munevar, Unctad economist.
There are 3.3 billion citizens who live in countries where more is spent to pay interest on loans than to finance spending on health or education. Half of developing nations spend a minimum of 7.4% of their export earnings on debt service. Countries in Africa borrow on average at rates that are four times higher than the US and even eight times higher than Germany.
“It is true that two thirds of the world’s public debt is in the hands of developed countries and that therefore vulnerability only affects the remaining third. The problem is not one of systemic risks, but rather one of systemic failure. The global financial architecture is inefficient and unfair”, affirms Daniel Munevar.
The total public debt of this group of vulnerable states increased from 35% of GDP in 2010 to 60% in 2021. Similarly, its external component, the part contracted with foreign creditors, grew in that period from 19% to 29 % of GDP.
This burden, if any, is compounded by the fact that by borrowing in foreign currencies, they are more exposed to external shocks and rising interest rates. Thus, the war in Ukraine caused a collapse of local currencies against the dollar. And the upward cycle of monetary policy means that, for example, financing with the IMF is now four times more expensive than before the rate hike, with rates close to 4.7%.
In the last ten years, the share of external public debt incurred by private creditors, such as bondholders, banks and other lenders, has increased in all regions, to represent 62% of the total external public debt of developing countries. in 2021. These loans from private sources tend to be more expensive than financing from multilateral sources (such as international organizations) or even bilateral (other states). And these creditors demand returns on their investment, making it more difficult to complete a successful debt restructuring. A vicious circle.
