Almost two-thirds of all countries in the Global South owed external debt to private creditors at the end of 2021, up from an average of less than 50% of their GNI in 2010. As interest rates rise due to monetary tightening in the global North, these high debt interest payments siphon off revenue that could otherwise be used for development.
It is a dangerous policy, and one that could have disastrous consequences. During the lead up to the global financial crisis (GFC) in 2008, banks and investors in the United States and elsewhere borrowed huge amounts to expand their lending and purchase mortgage-backed securities (MBS). They increased their leverage exponentially, and when house prices began falling they incurred enormous losses.
The economic collapse that followed was less severe than it might have been, but millions of people lost their jobs and much of their wealth. Economies took much longer than usual to recover from this shock, and many remain stuck in low growth.
A number of observers blame COVID for the debt crisis in a number of low-income countries, but the problem has deep roots and predates the pandemic. Rather, the root cause is a combination of factors, including monetary tightening in the global North and higher interest rates in the global South, which increase borrowing costs; the surges in food and energy prices that accompany wars and natural disasters; and declines in tourism revenues, foreign remittances, and investments by private-sector investors, who are seeking safety rather than returns.