A dozen developing countries might spin into a debt crisis within the next year, spelling financial trouble for some of the world’s most vulnerable people, per The New York Times.
Driving the news: Some estimates show developing countries owe US$200 billion to wealthy nations, banks and private creditors. Meanwhile, rising interest rates have increased the value of the US dollar, making it harder for those with debt denominated in US dollars to repay their loans.
Catch-up: Nations with unreliable revenue sources have long relied on debt to finance everything from energy imports to infrastructure. But recently, their debts have shifted from being owed to governments to commercial lenders (banks) who often offer worse terms.
- Many economies were already on shaky ground before the effects of the pandemic, inflation, and the war in Ukraine pushed another 100 million people into poverty.
Why it matters: Beyond making it harder for indebted nations to import the goods they need to survive (think crucial important like food and energy), a wave of loan defaults would spur a political rethink around how (and how freely) debt moves across borders.
- A debt crisis in developing countries will also impact advanced economies through increased migration flows and social unrest, according to the World Bank President.
What’s next: Mass defaults from small developing economies likely won’t lead to a full-blown global financial crisis, but it’s in everyone’s best interest to find ways to reduce debt, reschedule payments, and increase these countries’ resiliency to economic shocks.