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The Urgency of Sovereign-Debt Restructuring

Ever since public-debt levels soared during the pandemic, developing countries have faced mounting liquidity challenges. Yet the severity of the crisis is not reflected in the agenda for global cooperation, and no meaningful progress has been made toward a comprehensive debt-restructuring mechanism.

BOGOTÁ – Since the onset of the COVID-19 pandemic, the developing world has faced growing public-sector debt vulnerabilities. Interest-rate hikes and limited access to international capital markets have only exacerbated the problem – so much so that even solvent countries are now grappling with liquidity challenges. Furthermore, the International Monetary Fund predicts that, in the coming years, developing countries’ debt levels will remain higher than in 2019. It seems clear that many low- and middle-income countries will continue to experience debt stress, even if they are not at risk of default.

Yet the severity of the crisis is not reflected in the agenda for global cooperation. Last year’s G20 Summit in New Delhi, for example, advanced important proposals for development finance but made little progress on addressing the over-indebtedness of low- and middle-income countries. Most crucially, the world still lacks a comprehensive debt-restructuring mechanism to deal with this widespread and recurrent problem.

The oldest existing debt-restructuring mechanism, the Paris Club, covers only sovereign debt owed to its 22 members – mainly OECD countries. On occasion, multilateral lenders and foreign governments have adopted ad hoc responses to sovereign-debt crises. For example, the United States-backed Brady Plan, implemented after the Latin American crisis of the 1980s, helped reduce some countries’ debts and catalyzed the development of a sovereign-bond market for developing countries. In 1996, the IMF and the World Bank launched the Heavily Indebted Poor Countries Initiative to provide a much-needed reprieve for low-income countries; this was supplemented in 2005 with the Multilateral Debt Relief Initiative, which canceled eligible countries’ debts to multilateral creditors.