How to Prevent the Coming Sovereign Debt Crisis
Achieving greater transparency on the size, terms and conditions of obligations is one important place to start.
Unrest in Argentina shows how disruptive sovereign defaults can be.
Photographer: Fabian Gredillas/AFP via Getty Images
This year is likely to prove very difficult for those low-income and emerging-market countries that have been heavy borrowers in the sovereign debt market. A series of crises concentrated in these countries seems virtually inevitable.
As the Federal Reserve begins to tighten monetary policy, financing costs will rise and credit will become less available as higher interest rates reduce the incentive for investors to stretch for the type of yield offered by these countries. Fiscal space will also be limited because their economic recoveries are likely to lag behind advanced economies due to slower progress in immunizing their populations against Covid-19. The end of the moratorium provided by the Debt Service Suspension Initiative — implemented by the Group of 20 along with the International Monetary Fund and World Bank — will drive up debt service requirements and increase financial stress.