3. What causes a debt crisis?

The mainstream economic explanation for debt crises is that they are caused by governments spending more money than they can “afford” to – i.e. that their total revenues are lower than their total expenditures. This explanation of debt crisis lies within the neoclassical school, which views balanced budgets as the epitome of good economic governance. 

Global debt justice campaigners take a different view about how debt crises happen. They believe that sovereign debt crises cannot be simply blamed on excessive government spending; after all, many countries with high sovereign debts – and high government spending – never enter a debt crisis, for example, the United States. 

Instead, debt justice campaigners believe that sovereign debt crises happen for complex and varied reasons. For example: 

• Much debt – especially in the Global South, has its origins in colonialism, and the enforced uneven development of the Global South. 
• Much debt originated through lending by official lenders – the IMF, the World Bank, rich governments – to corrupt leaders who were known to be using loans for personal enrichment, or funding wars. These governments were often kept in power by rich allies such as the United States.  
• Much debt originated because of irresponsible lending – by multilateral, bilateral and private lenders – to countries who were clearly unable to afford the loan repayment terms. This happens because lenders have a financial incentive to lend because they earn interest from these loans. Without the threat of debt write-downs when countries cannot repay, there is a moral hazard that lenders will lend irresponsibly.   
• Often, debt burdens increased as a result of the failure of economic reforms which were imposed on countries in the Global South as a condition of lending.  
• Sometimes, sovereign debt results from the state nationalising private debts of corporations, as happened when governments in countries such as Ireland took on the debts of bankers. The rise in public debt globally since 2010, for example, can be traced back to government bailouts of private corporations in the last financial recession.  
• If a country develops an unsustainable debt burden because of one of the reasons above, often the only way for the country to avoid bankruptcy is to take on even more loans. This leads to a vicious cycle of snowballing debt. 

Modern Monetary Theory (MMT) provides additional explanations and theories about the causes of sovereign debt crises, which are explored in the FreshUP article on that topic.

A history of sovereign debt crises 

“We think that debt has to be seen from the standpoint of its origins. The origins of debt arise from the origins of colonialism. Those who lend us money are the same who colonized us before. They are those who used to manage our states and economies.”

– Thomas Sankara, former President of Burkina Faso (1987)