Explainer: how do debt crises happen?
This week, G-20—the world’s largest creditors, IMF and World bank have begun discussions about debt restructuring following the increasing frequency of debt default among emerging economies.
These conversations are critical because more than 19 countries worldwide have already begun to default on their loans, while 30 more are at risk of default.
In a Bloomberg and IMF index ranking of 50 emerging countries based on their risk of default, Nigeria is at the 24th position. That’s a better position than Ghana (2nd) and Kenya (6th), but we are worse off than Chile and Cote d’Ivoire.
Key takeaways:
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Global debt has reached the highest it has been in six decades. However, the size of the debt is less of a concern as about 60% of emerging countries are at risk of default.
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The debt accumulation speed and default are mostly due to increased access of emerging economies to international capital markets. While these loans are usually free of the conditionalities that come with multilateral lending, they have severe downsides.
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Downgrade in credit ratings, exchange rate risks, and lack of guidance to pay back the loans are some of the downsides of capital market lending that have increased the risk of debt default among African countries.
Therefore, even if the G20 is discussing debt restructuring specifically for a few countries like Ethiopia and Zambia that have requested it, the conversation will help set the pace for subsequent calls for debt restructuring by indebted countries.
This is not the first time the G20 has gathered to discuss debt restructuring. In 1996, the International Monetary Fund (IMF) and World Bank launched the Heavily Indebted Poor Countries (HIPC) debt relief program. As the name implies, the HIPC was established to bail out emerging countries with severe debt overhang—having way more debt than they could handle. These loans were mostly owed to the IMF, World Bank and G20 countries. Until the early 2000s, most countries in this program owed money to wealthy countries and multilateral organisations.
Today, national debt is a bit more complex, especially in emerging economies. In addition to wealthy countries and multilateral
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