Three Steps to Avert a Debt Crisis

IMF Blog, January 18, 2019

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Public debt is a growing problem across the globe: in advanced countries, public debt is at levels not seen since the Second World War, despite some declines recently.
Emerging market public debt has accumulated to levels last seen during the 1980s debt crisis.
Forty percent of low-income countries—that is, 24 of 60 countries—are in or at high risk of debt distress—the inability to service public debt, which could produce significant disruption of economic activity and employment.
As chair of the G20, Japan has made debt sustainability a priority issue for its G20 agenda.

Unprecedentedly high debt levels can be sustainable when real interest rates are very low, as they are at present in many advanced economies.
High debt levels increase vulnerability to:
- a tightening of global financial conditions and higher interest costs;
- market corrections, sharp exchange rate movements, and weakening capital flows;
- shocks such as natural disasters, exchange rate movements, or sudden reversals of capital flows that impair a country’s ability to pay back debt.
Borrowing can finance vital investments in infrastructure, health, education, and other public goods; investment in productive capacity can yield higher income that offsets debt-service costs.
Problems arise when:
- debt is already high and new borrowing proceeds are not spent wisely (including because of corruption and weak institutions);
- countries rely on sovereign bond issuances, loans from new official lenders, and foreign commercial creditors, which often come with higher interest rates and shorter maturities, increasing the cost of servicing debt and complicating management.
Diversification of financing sources brings benefits but also creates new challenges for creditor coordination and debt restructuring since mechanisms to include new creditors are not in place.

Advanced economies: very low real interest rates have mitigated immediate costs, but high debt levels increase vulnerability to rising rates.
Emerging markets: facing exchange rate movements and sudden reversals of capital flows that impair debt-servicing capacity.
Low-income countries:
- typically face the most difficult debt challenges and are usually the least well-equipped to respond;
- many need substantial additional resources for development and have increasingly relied on sovereign bonds and new official and commercial creditors;
- one-third of low-income countries do not report on guarantees extended by the public sector;
- fewer than one in ten report on the debt of public enterprises.

First: Ensure sovereign borrowing is financially sustainable.
- Borrowers should carefully set fiscal spending and deficit plans to keep public debt on a sustainable path.
- Borrowers should closely consider potential returns on their projects and their ability to repay through higher tax revenues before taking on new debt.
- Lenders need to assess the impact of new loans on the borrower’s debt position before extending fresh credit to protect both lender and borrower from future financial difficulties.
Second: Ensure comprehensive and transparent reporting of public debts.
- Strengthen institutions that record, monitor, and report debt in many developing countries.
- Increase disclosure of guarantees and of public enterprise debt (noting current gaps: one-third do not report guarantees; fewer than one in ten report public enterprise debt).
- Creditors should allow fuller disclosure of the terms and conditions of borrowing to help prevent the build-up of large “hidden” liabilities that later become explicit government debt.
Third: Promote collaboration among official creditors to prepare for debt restructuring cases involving non-traditional lenders.
- With a high level of debt held by new creditors, consider how to make official creditor coordination work so it can be effective in resolving debt crises.

The IMF, along with partner institutions, is:
- working closely with member countries to bolster their capacity to record and manage debt and ensure transparency;
- strengthening methodologies for assessing debt sustainability and training country officials in using them;
- actively engaging with new lenders, including to enhance their capacity to participate in multilateral debt restructurings, should they be necessary.

Starting in the 1980s, it took decades of grinding negotiations to create mechanisms to resolve the debt crises in Latin America and then in heavily indebted poor countries.
Research and events have highlighted how debt overhangs affect economic recoveries in advanced economies.
The present debt build-up requires anticipating risks and taking the right steps to mitigate them.

Three Steps to Avert a Debt Crisis — Martin Mühleisen, Mark Flanagan, January 18, 2019

債務危機を防ぐための3つの手段マーティン・ミューライゼン　マーク・フラナガン著　IMFブログ 2019年1月18日
- 債務危機を防ぐための3つの手段マーティン・ミューライゼン　マーク・フラナガン著　IMFブログ 2019年1月18日 (Markdown version)
- 債務危機を防ぐための3つの手段マーティン・ミューライゼン　マーク・フラナガン著　IMFブログ 2019年1月18日 (PDF)
Drei Schritte zur Vermeidung von Schuldenkrisen
- Drei Schritte zur Vermeidung von Schuldenkrisen (Markdown version)
- Drei Schritte zur Vermeidung von Schuldenkrisen (PDF)