A person who is struggling to pay their debts gets a fresh start when they file for bankruptcy, which allows them to shed the burden of their past mistakes and start again. But countries do not have such a mechanism when they find themselves in financial trouble. Instead, they must face the consequences of the decisions made by their international creditors—often private banks and hedge funds.
In an era of historically low interest rates, many countries went way beyond their means, spending on consumption and investment while the global economy slowed and commodity prices plunged. As a result, their debts ballooned. In some cases, high debt payments siphon off revenue that could otherwise go toward investment and essential services like health care and education.
Ultimately, these debt service payments are crowding out investment in the future and diverting resources from vital infrastructure projects or tackling the climate emergency. The gap between those who make the lending decisions and those who must live with the consequences is extreme and unjust.
While global economic growth appears to be stabilizing and inflation is easing, the world remains at risk of a serious debt crisis. At the very least, such a crisis would jack up interest rates and crimp living standards in rich economies—including our own—while threatening those in the Global South that depend on export income to cover their growing debt obligations. AEI Senior Fellow Steven Kamin and Ilene Grabel, professor of global finance at the Josef Korbel School of International Studies, offer their perspectives on this growing threat to world prosperity.