ocampo46_JUAN MABROMATAAFP via Getty Images_debt JUAN MABROMATAAFP via Getty Images

The New-Old Sovereign-Debt Challenge

To help poorer countries at risk of sovereign-debt distress, international policymakers need to promote much greater private-creditor participation in debt reprofiling and restructuring. They should also provide additional financial support that enables these countries’ continued investment in sustainable development.

NEW YORK – One of the COVID-19 pandemic’s many complex legacies will be a high level of public-sector debt in most countries. This reflects governments’ increased spending to tackle the crisis, as well as the collapse of tax revenues as economies imploded in 2020. As a result, many lower- and middle-income countries are at risk of sovereign-debt distress.

Although many developed countries are heavily indebted, their interest rates are low by historical standards – and negative in real terms. Developing countries, despite increasing their public spending less sharply during the COVID-19 crisis, must pay higher interest rates on their sovereign debt. These rates, and the risk spreads that poorer countries pay in international capital markets, may rise as interest rates in advanced economies – and the United States in particular – start to climb.

Shortly before the annual International Monetary Fund and World Bank meetings in October 2020, IMF Managing Director Kristalina Georgieva called for urgent reforms to the international debt architecture. But action has been quite limited.

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