Sovereign debt in developing countries: old challenges in new settings

Abstract

Sovereign indebtedness in low- and middle-income countries has risen sharply since the mid-2010s, reversing the favourable dynamics that followed the debt-relief initiatives in the first decade of the century. This change has primarily been driven by the conventional arithmetic of debt in which rising real interest rates relative to the underlying growth rate of the economy, combined with a weakening of the primary fiscal balance, renders high levels of sovereign borrowing unsustainable, pushing a number of countries to the edge of, or into, sovereign default. But many of the challenges facing sovereign debtors today stem not from unprecedented debt levels but from a fundamentally altered creditor landscape, which has seen the retreat of traditional Paris Club lenders and the rise of China and private bondholders, and from a growing reliance on often costlier domestic debt. This paper introduces a collection of papers that examine three related themes: the changing composition of creditors and its implications for sovereign debt restructuring (including via the G20 Common Framework); the search for new development finance amid constrained concessional flows; and mounting pressure on sovereigns to finance climate and nature-related investment.