The new debt crisis

In the following analysis of the debt situation of countries of the Global South, Jürgen Kaiser, warns that since 2010 the situation has worsened significantly for many countries. As a result, out of the 141 countries examined, some 119 are critically in debt.

IN the analysis that follows, which was undertaken for the ‘Global Sovereign Debt Monitor 2018’ report, three dimensions are used to evaluate the debt situation of countries in the Global South: (i) the debt situation, i.e., the level of debt indicators as at 31 December 2016; (ii) the trend, i.e., the change in this debt situation over a period of four years; and (iii) any suspension of debt service payments by individual countries is taken into consideration.

Debt situation

Low- and middle-income countries’1 external debt increased in 2016 by 4.1% to $6.877 trillion. Of this, only a modest $121.3 billion pertains to low-income countries, $1.775 trillion pertains to lower-middle-income countries and $4.981 trillion to upper-middle-income countries.

This would not be problematic if the economic performance of the indebted countries grew at the same rate as their debt. It is therefore important to consider relative debt, which in the present analysis is measured on the basis of five debt indicators describing the relationship between debt and economic performance (see box).

For example, the indicator measuring the ratio of external debt to gross national income (GNI) [or gross domestic product (GDP)] positions the total external debt of a country relative to its annual economic performance. The analysis shows that at the reporting date, over half of all low- and middle-income countries have a debt-to-economic-performance ratio of more than 40%, and 20 of them exceed 80%. This means that theoretically they would have to spend more than 40% (or in the latter case, 80%) of their annual economic output to repay their entire debt.

Since 2010, the situation has worsened significantly in many countries (see Figure 1). However, the trend is not uniform for all countries examined. On the one hand, there are countries with improving or stable indicators such as Jamaica, which, as in the previous year, has the highest debt indicators but no longer falls into the highest risk level for all indicators. On the other hand, there are countries which combine strong rises in their indicators with already high levels of debt: these include, for example, Mozambique, Armenia and Cape Verde.

New lending has risen to all country income groups except the group of the poorest countries.2, 3 On the donor side, bilateral public lending has grown the most, doubling year-on-year to $84 billion. However, this is not attributable to the traditionally important creditor countries such as Germany, the US or Japan, but is primarily the result of increased South-South lending. Large emerging economies, especially China, are playing an increasingly important role as new lenders.

Who is critically in debt?

Currently, 119 out of a total of 141 countries examined are critically in debt.4 A country’s debt situation is considered critical if at least one debt indicator shows a level of risk (see box) or if the International Monetary Fund (IMF) has confirmed in its most recent debt sustainability analysis that there is at least a ‘moderate’ risk of debt distress. Countries with particularly high debt indicators include Jamaica, Mongolia, Bhutan and Mozambique.

Compared with last year’s ‘Global Sovereign Debt Monitor’, an additional seven countries now have to be considered critically indebted because in 2016 they reached a level of risk for at least one debt indicator. Six of these countries are in Africa: Namibia, Nigeria, Ethiopia, Benin, Liberia and Uganda. The seventh country is Azerbaijan.

If one recalls that Ethiopia, Benin, Liberia and Uganda had been relieved of their debt between 1997 and 2010 under the multilateral debt relief initiative for Heavily Indebted Poor Countries (HIPC), it becomes clear that one-off debt relief does not protect countries from falling into debt crises again, as long as the same structures that led to the last crisis persist.

Unlike in last year’s Debt Monitor, middle- and low-income countries that are member states of the European Union have been excluded from consideration, as questions of overcoming future debt crises are somewhat different for them than for most countries of the Global South. Therefore, Bulgaria, Romania, Croatia and Cyprus are no longer listed.

Compared with the already dramatic scenario of 2015, as presented in the ‘Global Sovereign Debt Monitor 2017’, the situation at the end of 2016 worsened – with the number of countries critically in debt rising from 116 to 119. Although this appears to be only a modest increase, if one takes into account that four (EU) countries have not been included in the latest analysis for formal reasons – and not because their debt situation has improved – there has in fact been a rise of seven countries, representing an increase of around 6% for critically indebted countries in the Global South. In addition, the countries in critical debt tend to be deeper in debt than in previous years.5 Overall, it should be noted that global debt has reached a worryingly high level.


Whereas an overwhelming majority of the countries in the Global South are already critically in debt, the medium-term trend towards further indebtedness continues. As in the previous year, there is an average of 3.6 debt indicators that have deteriorated by at least 10% over the last four years, for every one that has improved. (See box for an explanation of how the indebtedness trend is determined.) In 87 countries, there was a general worsening of the debt situation over the period 2012-16, compared with an improvement in 21 countries. There was no obvious trend in 11 countries.

The strongest negative debt dynamics can be observed in the affected countries in the North Africa/Middle East region. Although only a handful of countries in the region are critically in debt, none of these countries has improved on even one of the five debt indicators. The Europe/CIS region is similarly affected. Both in terms of present debt levels and the trend of the debt indicators, the listed countries in Asia and the Pacific are the least susceptible to over-indebtedness.

Countries in default

The most dramatic outcome of the debt crisis, which has been worsening for years, is that a wide range of countries have now had to cease all or part of their debt servicing (see Table 2). Instead of continuing to issue warnings that a new wave of debt crises is looming in the Global South, it has to be said that the crisis is already here.

Detailed analysis shows that countries that default on payments include, on the one hand, countries that have been insolvent for several years, such as Zimbabwe, which has been in default since the mid-1990s. This category also includes those of the Heavily Indebted Poor Countries (HIPCs) which formally have access to the debt relief initiative but for which a decision on debt relief has not yet been made: namely Eritrea, Somalia and Sudan. Countries outside the international financial system, such as Cuba and North Korea, are also included in this category.

In addition, and most worryingly, 11 countries have been added which have had to cease payments to external creditors since 2015, either temporarily or permanently, as a result of external shocks and/or political instability. Currently, Venezuela, Angola, South Sudan, Chad and Mozambique are in this position. The first four became insolvent mainly as a result of the fall in oil prices. Due to its civil war, Yemen also has to be added to this list. The Republic of Congo, Belize and Gambia, all also on the list, have, with the support of the IMF, been able to make up for defaulted payments to their foreign creditors during 2017, albeit at the cost of new multilateral debt and related adjustment measures. Meanwhile, the Caribbean island nation of Grenada has signed rescheduling agreements with its bilateral creditors, which are now gradually being implemented.

Three countries – Cambodia, Iraq and Ukraine – are considered to be in default because they refuse to satisfy claims that they consider unlawful. In Ukraine, this applies to a loan from the Russian Federation to the pro-Russian ex-president Viktor Yanukovych; while in Cambodia this goes even further back to the financing of the regime of General Lon Nol by the US government in the 1970s. Iraq and Kuwait are arguing over the validity of Saddam-era claims and the interpretation of the 2004 rescheduling agreement.

A total of 31 other countries have payment arrears vis-à-vis bilateral public or private creditors. They are not listed individually in Table 3 because, unlike in most cases mentioned above, the arrears are not the result of the (potential) insolvency of the debtor but of the absence of an agreement between the debtor and the creditor. The largest group in this category are 22 HIPCs whose rescheduling agreements have not yet been implemented with all public and private creditors. This can occasionally be related to payment problems. In general, however, creditors are not interested in a scheme in which they would have to officially renounce 90% of their claims, but prefer to remain in a state of persistent non-payment, without formally renouncing the claim.

The other nine countries are non-HIPCs which are currently not servicing individual – mostly private – claims. Unregulated old debts of this kind can become a sensitive issue for a debtor if a creditor decides to sell the debt at a high discount to a ‘vulture fund’, with the latter then seeking seizure of the debtor’s foreign assets or repayment through litigation in a third country.6

Patterns of indebtedness

The current debt crisis is not the crisis of a particular development model,7 a particularly affected region, or the result of a particular type of external shock. In the group of countries which are already in the critical range for most of the indicators and which also show strong negative dynamics, both low- and middle-income countries are represented. These include countries that belong to the group of least developed countries as defined by the United Nations, such as the Gambia, Tuvalu and Bhutan; but there are also countries that sit at the G20 (grouping of major economies) table, such as Argentina, Mexico and South Africa.

Nevertheless, one can identify some patterns of over-indebtedness. They can serve as the basis for appropriate strategies for overcoming crises. The following groups of countries are particularly vulnerable:

• Fragile states: Countries that are politically unstable and therefore constrained in their ability to borrow responsibly. These include, for example, the post-conflict country of Burundi and also Jordan, where instability is not its own but that of its neighbour, Syria.

• Commodity exporters: Countries that pursue an extractivist development model and, after a fall in commodity prices, face the choice of significantly limiting public spending or financing the resulting budgetary gaps through loans. Examples include Angola, the Republic of the Congo and Venezuela.

• Small states: Countries that are particularly vulnerable to natural disasters because of their small size and/or location, including Cape Verde and, to some degree, Belize.

• Countries with a combination of factors: Finally, a group where a worsening of the debt situation cannot be attributed to a single major factor, but is due to several factors such as internal instability, questionable borrowing in the past, the consequences of climate change and other external shocks. These presently include, in particular, Latin American middle-income countries, such as El Salvador.

It must be noted that the debt crisis is here, it is global, it affects very different groups of countries and therefore, by definition, it affects different groups of creditors in different countries.


In 2017, i.e., after the 31 December 2016 cut-off date of our present analysis, further increases of debt levels were observed in most countries for which more recent data is already available. Therefore, even without unforeseeable external shocks, the ‘Global Sovereign Debt Monitor 2019’ will in all likelihood paint a picture similar to this one. Unless it is addressed politically, the crisis will persist and even worsen, not least thanks to initiatives to promote private capital investments.8

Previous sovereign debt crises have shown that at some point, high debt levels create a threatening reality: ongoing debt servicing absorbs so much of a country’s economic output that it can only be sustained at the price of further borrowing. Countries are literally in a ‘debt trap’.9

Over-indebtedness is not only a problem when it comes to the suspension of debt service payments. Experience shows that governments often keep up with their debt service obligations even though the resources are badly needed within the country. For the people in the affected countries, this often means painful cuts in social services. For example, public healthcare and public education provision may deteriorate, meaning only those that can pay can access quality services. It is often the poorest who suffer disproportionately from such austerity measures.

The so-called ‘Third World debt crisis’ of the 1980s and 1990s has shown that it is cheaper for all parties to reduce debt early on, because financing debt service with new (multilateral) credit amounts to the proverbial extinguishing of a fire using petrol. 2018 is perhaps the last year in which it is still possible to extinguish a large-scale fire with a few targeted and not too costly debt reductions.                            

Jürgen Kaiser is co-founder and coordinator of the German Debt Crisis Network and Jubilee Germany (

       The above is extracted from the ‘Global Sovereign Debt Monitor 2018’ report published by Jubilee Germany and Misereor. The full report, which includes the debt figures for individual countries, is available on Jubilee Germany’s website (


The World Bank divides countries into four groups according to their per capita gross national income: high-income countries, upper-middle-income countries, lower-middle-income countries, and low-income countries.

Methodology of debt analysis

In this analysis, three dimensions of debt are taken into account:

•  the debt situation, i.e., the level of debt indicators as at the reporting date 31 December 2016;

•  the trend, i.e., the change in this debt situation over a period of four years (2012-16); and

•  the intermediate and ongoing suspension of debt service payments by individual countries.

The debt indicators for the analysis are:

•  public debt/gross domestic product

Is the government more indebted at home and abroad than the efficiency of the entire economy dictates?

Public debt is the explicit and implicit liabilities of the public sector – from central government to public enterprises. Public debt also includes the debts of private companies for which the state has issued a guarantee.

•    public debt/annual government revenue

Is the government so heavily indebted at home and abroad that its income can no longer guarantee ongoing debt servicing?

•  external debt/gross domestic product

Does the entire economy have more payment obligations vis-à-vis foreign countries than its economic performance dictates?

External debt includes the liabilities of both the public and private sectors of a country vis-à-vis foreign creditors. This indicator points to the overall economic burden, i.e., whether an economy produces enough goods and services to service its debt.

• external debt/annual export earnings

Are the external debts of the state, citizens and companies so high that exports cannot generate enough foreign exchange to pay the debts?

In most cases, external debt cannot be repaid in local currency. Debt servicing requires the generation of foreign exchange through exports, migrant remittances or new indebtedness.

•  debt service/annual export earnings

Is the current external debt servicing of the state, citizens and companies so high that exports do not at present generate enough foreign exchange to pay interest and repayments due in the current year?

This indicator shows the ratio of annual repayment and interest payments to export earnings. It shows whether the annual debt service – irrespective of the overall debt level – overstretches the current performance of an economy in a given year.

For each of the five indicators above, there are three levels of risk (see Table 1). In line with these three risk levels for each of the five indicators, each country is assigned a value of between 0 and 15. For example, if a country is at the highest risk level (i.e., third level) for all five debt indicators, it has a value of 15. Based on these values, the debt situation of a country is classified as follows:

• 0-4: slightly critical

• 5-9: critical

• 10-15: very critical

[Countries with a value of 0 are categorised as having a ‘slightly critical’ debt situation if they are deemed by the International Monetary Fund (IMF) to have at least a ‘moderate’ risk of debt distress.]

The trend for each debt indicator is determined by seeing whether it has changed (i.e., increased or decreased) by at least 10% in the four years from 2012 to 2016. An aggregated debt trend based on all five indicators is then calculated for each country. If more debt indicators have improved than deteriorated over the four-year period, the general debt trend is presented as an improvement. If more indicators have deteriorated than improved, the general debt trend is said to have deteriorated.

The situation regarding suspension of debt service payments is presented in Table 2.

Figure 1. External debt 2010 to 2016

In relation to the gross national income of low- and middle-income countries

Source: World Bank: ‘International Debt Statistics 2018’

Table 1: Levels of over-indebtedness (in per cent)

Table 2: Payment suspension by low- and middle-income countries

*Third World Resurgence No. 329/330, January/February 2018, pp 16-20