“A devastating catastrophe”, in the words of the Secretary General of the United Nations, Antonio Guterres. Global public debt reached another ceiling. It was 2022 of 82 billion euros. It exceeds all the wealth produced in one year in the US, China, the EU and Japan, according to the latest report by 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 has forced all states to ask for more money.
But this growth has been on the rise for twenty years. If world GDP has tripled since 2002, the debt has multiplied 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 pit.
“Debt in itself is not bad. It’s another tool. But in developing countries this money mobilizes few resources because the financial burden has increased and has become an obstacle. And if they do not develop, this debt will not be able to be paid”, explains Daniel Munevar, economist at Unctad.
There are 3.3 billion citizens who live in countries where more is spent to pay interest on loans than to finance health or education expenses. 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 systemic risk, but systemic failure. The global financial architecture is inefficient and unfair”, says Daniel Munevar.
The total public debt of this group of vulnerable states increased from 35% of GDP in 2010 to 60% in 2021. Similarly, the external component, the part contracted with foreign creditors, increased in this period from 19% to 29% of GDP.
This burden, in their case, is aggravated by the fact that since loans are made in foreign currencies, they are more exposed to external shocks and to rising interest rates. The war in Ukraine caused local currencies to fall 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%.
Over the past ten years, the share of external public debt held by private creditors, such as bondholders, banks and other lenders, has increased in all regions, to represent 62% of total external public debt in developing countries in 2021. These loans from private sources are usually more expensive than financing from multilateral sources (such as international organizations) or even bilateral (other states). And these creditors demand returns on investment and this makes it more difficult to successfully complete a debt restructuring. A vicious circle.
