{
  "title": "Dangerous Global Debt Burden Requires Decisive Cooperation",
  "publication": "IMF Blog, April 11, 2022",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2022/04/11/blog041122-dangerous-global-debt-burden-requires-decisive-cooperation",
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  "summary": "With elevated risks to sovereign debt, a global cooperative approach is necessary to reach an orderly resolution of debt problems and prevent defaults.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Authors: Vitor Gaspar, Ceyla Pazarbasioglu\n- Date: April 11, 2022\n- Core message: With elevated sovereign debt risks amid the pandemic and the war in Ukraine, a global cooperative approach is necessary to reach orderly resolutions of debt problems and prevent defaults.\n- Context: Pandemic-related fiscal support stabilized financial markets and supported recovery but increased public and private borrowing to unprecedented levels; the war in Ukraine adds further fiscal strain."
    },
    {
      "heading": "Record debt",
      "content": "- During the pandemic, deficits increased and debt accumulated much faster than in early years of other recessions, comparable only to the two 20th century world wars.\n- Key statistics:\n  - Borrowing jumped by 28 percentage points to 256 percent of gross domestic product in 2020.\n  - Government accounted for about half of this increase; the remainder came from non-financial corporations and households.\n  - Public debt now represents close to 40 percent of the global total, the most in almost six decades.\n  - Emerging market and developing countries (excluding China) accounted for a relatively small share of the increase.\n  - About 60 percent of low-income countries are now in, or at risk of, distress."
    },
    {
      "heading": "Risks from rising inflation and tightening financial conditions",
      "content": "- Two elements had previously kept debt service costs low:\n  - Nominal interest rates were very low, close to zero or even negative along the yield curve in countries such as Germany, Japan and Switzerland.\n  - Neutral real interest rates were on a significant downward trend in many economies, including the United States, the euro area, and Japan, as well as a number of emerging markets.\n- Changing dynamics:\n  - Real interest rates below real growth rates contributed to a perception of painless fiscal expansion, but heightened risk perception and expected monetary policy tightening have brought debt vulnerabilities back into focus.\n  - Persistent inflation—and inflation volatility—ultimately can raise the cost of borrowing; this can happen quickly in countries with short debt maturities.\n- Projections and impacts:\n  - In advanced economies, economic activity, the primary balance, spending, and revenues are projected to return close to pre-pandemic projections by 2024.\n  - Emerging and low-income economies face persistent GDP and revenue losses, implying primary spending will be persistently lower and progress toward the Sustainable Development Goals will be pushed back.\n- Distributional vulnerabilities:\n  - Sharp increases in energy and food prices add pressure on the poorest and most vulnerable.\n  - Food accounts for up to 60 percent of household consumption in low-income countries.\n  - Low-income countries that rely on imported fuel and food may require more grants and highly concessional financing.\n- Additional pressures:\n  - Global financial conditions are tightening as major central banks raise interest rates to contain inflation.\n  - In most emerging markets, sovereign spreads are already above pre-pandemic levels.\n  - The credit crunch is exacerbated by declining overseas lending originating from China, driven by solvency concerns in the real-estate sector; expanding lockdowns in Shanghai and other major cities; the transition to a new growth model; and problems associated with existing loans to developing countries."
    },
    {
      "heading": "A global cooperative approach",
      "content": "- Debt restructurings are likely to become more frequent and will involve more complex coordination challenges because of increased creditor diversity.\n- Having mechanisms in place for orderly restructuring is in the best interest of creditors and debtors alike.\n- Recent initiatives and gaps:\n  - For low-income countries, the Debt Service Suspension Initiative expired at the end of 2021.\n  - The Group of Twenty’s Common Framework for Debt Treatments beyond the DSSI has yet to deliver; improvements are needed.\n  - Options should be explored to help a broader range of emerging and developing economies that are not eligible for the Common Framework but would likely benefit from a globally cooperative approach.\n- Risks of inaction:\n  - Muddling through will amplify costs and risks to debtors, creditors and global stability and prosperity.\n  - The impact will be most sharply felt by households that can least afford it."
    },
    {
      "heading": "Policy recommendations and IMF role",
      "content": "- Strengthen debt transparency and debt management policies and frameworks through governance reforms to reduce risks.\n- Undertake reforms to improve debt transparency and strengthen debt management policies and frameworks.\n- Provide granular policy advice and capacity-building activities to address root causes of unsafe debt.\n- Where liquidity support alone is not enough, policymakers need to take a cooperative approach to:\n  - Ease the debt burdens of the most vulnerable countries.\n  - Foster greater debt sustainability.\n  - Balance the interests of debtors and creditors in a balanced way.\n- Mobilize more grants and highly concessional financing for low-income countries dependent on imported fuel and food.\n\nIMF blog post: Dangerous Global Debt Burden Requires Decisive Cooperation — Vitor Gaspar, Ceyla Pazarbasioglu, April 11, 2022.\n\n---\n\n\n References\n\n- https://www.imf.org/wp-content/uploads/2022/04/debt-chart-panel-final-01.png\n- can raise the cost of borrowing\n- complex coordination challenges\n\nSource: https://www.imf.org/en/blogs/articles/2022/04/11/blog041122-dangerous-global-debt-burden-requires-decisive-cooperation"
    }
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    "Authors: Vitor Gaspar, Ceyla Pazarbasioglu",
    "Published: April 11, 2022",
    "Authors: Vitor Gaspar, Ceyla Pazarbasioglu",
    "Date: April 11, 2022",
    "Core message: With elevated sovereign debt risks amid the pandemic and the war in Ukraine, a global cooperative approach is necessary to reach orderly resolutions of debt problems and prevent defaults.",
    "Context: Pandemic-related fiscal support stabilized financial markets and supported recovery but increased public and private borrowing to unprecedented levels; the war in Ukraine adds further fiscal strain.",
    "During the pandemic, deficits increased and debt accumulated much faster than in early years of other recessions, comparable only to the two 20th century world wars.",
    "Key statistics:",
    "Two elements had previously kept debt service costs low:",
    "Changing dynamics:",
    "Projections and impacts:",
    "Distributional vulnerabilities:",
    "Additional pressures:",
    "Debt restructurings are likely to become more frequent and will involve more complex coordination challenges because of increased creditor diversity.",
    "Having mechanisms in place for orderly restructuring is in the best interest of creditors and debtors alike.",
    "Recent initiatives and gaps:",
    "Risks of inaction:",
    "Strengthen debt transparency and debt management policies and frameworks through governance reforms to reduce risks.",
    "Undertake reforms to improve debt transparency and strengthen debt management policies and frameworks.",
    "Provide granular policy advice and capacity-building activities to address root causes of unsafe debt.",
    "Where liquidity support alone is not enough, policymakers need to take a cooperative approach to:",
    "Mobilize more grants and highly concessional financing for low-income countries dependent on imported fuel and food.",
    "[https://www.imf.org/wp-content/uploads/2022/04/debt-chart-panel-final-01.png](https://www.imf.org/wp-content/uploads/2022/04/debt-chart-panel-final-01.png)",
    "[can raise the cost of borrowing](https://www.imf.org/en/Publications/fandd/issues/2022/03/Steady-prices-sustainable-debt-Reis)",
    "[complex coordination challenges](https://blogs.imf.org/2022/04/07/restructuring-debt-of-poorer-nations-requires-more-efficient-coordination/)"
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