IPD AI Insights

Support Memorandum, REF: S.4747 Hoylman-Sigal, A.2970 Fahy

11/18/2024
Open Letters
Initiative for Policy Dialogue
Debt and Global Finance

In 2019, debt for developing countries stood at a 50-year high. Since then, the Covid-19 pandemic, the Ukraine war and rising interest rates in major economies’ central banks exacerbated debt vulnerabilities.

Overview

An important development in the decade preceding the pandemic was the growing role of private creditors. In 2010, the share of developing country debt held by private creditors was 46 percent, according to the World Bank. By the end of 2021 it had shot up to 61 percent. The trend holds even in the poorest countries, where the share of private creditor debt went from 5 percent to 21 percent in the same period. Within the universe of private creditor debt, the largest increase in the last 15 years occurred primarily in the form of bonds, not bank loans.

In this context, establishing an orderly way to restructure sovereign debt is of paramount importance. The need for a fresh start is both a matter of efficiency and equity.

Within virtually all countries, mechanisms to restructure debts exist in the form of bankruptcy laws, which are now seen as a vital part of market economies, yet there is no comparable mechanism for the debts of sovereigns.

In the wake of the pandemic, when the G20 agreed on a temporary Debt Service Suspension Initiative (DSSI), private creditor participation was voluntary. No debtor dared to stop paying their private creditors, for fear of lawsuits and credit downgrades, and no private creditor stopped collecting.