Since 2010, both sovereign debt and private, corporate debt have reached new all-time highs globally. Much of this rise can be traced back to the large financial crisis post-2008. After 2008, governments in a number of rich countries chose to nationalise the debts of private corporations and banks. Additionally, the policy of “Quantitative Easing” (QE) by the European Central Bank, the US Federal Reserve and other central banks released $11 trillion into the global economy – effectively increasing government debt in order to buy up corporate debt – and provide cash to those corporations. There was little control over how this cash release was used, and much of it was lent on to countries in the Global South, who are now exposed to corporate lenders. This is similar to the pattern of lending in the 1970s and 1980s.
These factors combined meant that annual lending to countries in the Global South more than doubled from $185 billion in 2007 to $452 billion in 2018. The profile of lenders has also shifted, with over 55% of all interest paid by Sub-Saharan African countries on sovereign debt going to private lenders (whose interest rates are far higher). An increase in private loans exposes countries to fluctuations in international currencies and bond markets , meaning that, as debt spirals in the Global South, so too does their exposure to any coming global financial crisis.
And in the Global South, instead of this new debt being used to invest in economic development, or in achieving the Sustainable Development Goals (SDGs), the evidence shows that many times, the new debt was simply used to repay existing, escalating debts.
Over the last decade, debt in Lower Income Countries (LICs) has increased from an average of over 40% of GDP in 2009 to 49% in 2019 – meaning that the levels of debt in poor countries are well outstripping growth in the ‘real’ economy. The real economy concerns the production, purchase and flow of goods and services within an economy (in contrast, the financial economy is where financial services account for an increasing share of national income relative to other sectors). Meanwhile, over the last five years, the number of countries at high risk of debt crisis or already in debt distress has increased from 37 to 51.
Between 2010 and 2018, external debt payments as a percentage of government revenue grew by 83 per cent in low- and middle-income countries, from an average of 6.71 per cent in 2010 to an average of 12.56 per cent in 2018. In Sub-Saharan Africa specifically, the proportion of government revenue destined for external debt service payments more than doubled, from 4.56 per cent in 2010 to 10.8 per cent in 2018.
This growing debt crisis has been compounded further by the emergence of the Covid-19 pandemic. Eurodad estimates that a debt moratorium for 2020-2021 for 69 low-income countries who are in some way at risk of debt distress, could free up anywhere up to $50.4 billion in additional funding to tackle the Covid-19 outbreak. Meanwhile, as the financing needs for mitigating and adapting to climate change increase, a full two thirds of funding available for low income countries to tackle climate change is in the form of loans – adding further to debt bubbles. Falling commodity prices are worsening the crisis.
