The new global debt crisis: Your questions answered

What is the new global debt crisis?

Many of the world’s poorest countries have been plunged into a new debt crisis. The amount that lower income countries spend on debt payments has increased by 150% since 2011. Despite facing significant poverty burdens, countries are having to make huge repayments on high-interest loans to wealthy banks, institutions and governments, leaving them unable to properly fund essential services.

About 3.3 billion people now live in countries where debt interest payments are greater than expenditure on health or education. This debt burden also leaves countries less able to cope with the increasing effects of climate change. In many countries, debts are being paid at the expense of hiring doctors and teachers, building schools, hospitals and sewage systems, preparing for floods or coping with droughts.

Why is CAFOD talking about debt right now?

Low-income countries have been facing increasingly unsustainable debt since the 2008 financial crisis, when banks, hedge funds and traders saw an opportunity to make vast sums of money by lending to them at high interest rates.

Almost half of the total external debt owed by lower income countries is to these ‘private lenders’, including BlackRock and HSBC, who often lend recklessly, and with no accountability, and as a result make huge profits. This is causing more and more countries to fall into debt crisis. Today, there are 54 low-income countries facing unsustainable debt levels, up from 22 in 2015.

Wasn’t the problem of debt addressed by Jubilee 2000, almost 25 years ago?

CAFOD has campaigned against unjust debt for a long time. After decades of debt justice activism in the global south, the late 1990s saw the issue of debt become a mainstream issue with the Jubilee 2000 movement.

Between 2000-2015 the global Jubilee campaign won $130 billion of debt cancellation for 36 lower income countries, which on average reduced their debt by three quarters. In countries that had debts cancelled, children completing primary school increased from 45% in the 1980s/1990s to 66% by 2012 as the money governments saved went into public services.

However, the scheme did not prevent debt crises recurring. No new regulations were introduced to make lenders more responsible or transparent. The same structural causes that led to the crisis remain in place. That is why we need action now.

What is CAFOD calling for on the debt crisis?

The UK government has the power to do something about this. Incredibly, almost 90% of debt contracts of the poorest countries are governed by English law due to the pivotal role of the City of London in the global financial sector. This means the UK ultimately oversees how these debts are enforced and could introduce legislation to make private lenders take part in debt relief.

Currently, when a country requests debt cancellation because they are unable to meet repayments, other governments, and multilateral institutions like the World Bank and IMF, work with that country to find a way forward. But private lenders have not taken on the same responsibility, often refusing to cooperate in the process and profiting hugely as a result. They insist on repayments no matter the human cost, and countries even face the threat of being sued.

The G20 group of countries have taken steps to address the debt crisis, but without preventing future debt crises, these measures will never be enough. We need new legislation that would ensure fair and equal treatment for lenders so that private lenders are compelled to participate when debts are restructured, meaning countries’ debts are reduced in a more comprehensive and effective way. As UK citizens, we can play a key role in pushing our government to pass this legislation.

Shouldn’t debts just be repaid?

We believe that paying debts should never be put ahead of funding public services or tackling the climate emergency. Doing so means debt payments to lenders are being prioritised over life itself.

Private lenders lent to lower income countries at high interest rates – around 6%-10% - at a time when they were lending to governments like the US and UK at 0%-1%. They supposedly charged these high interest rates because of the risk of not being paid. Therefore, the lenders were always aware that defaulting might be a risk.

Over recent years we have had a succession of shocks – the COVID pandemic, rising food and energy prices, rising global interest rates and climate disasters. The risk has materialised, and so private lenders must be made to take part in debt relief. Otherwise they will make mass profits, while people in the affected countries will suffer from declining public services and economic stagnation.

Won’t countries just get into debt again if it’s cancelled?

Not if we reform the system to stop the cycle of debt crises from happening. We need clear legislation and a permanent global debt mechanism to ensure that debts are agreed transparently and that there is a functional relief and restructuring framework.

This will incentivise lenders to be more responsible with their loans, taking greater care over whether they can be repaid. This will reduce the amount of debt crises and so the need for debt relief in the future. A transparent register of loans would also help hold governments and lenders to account, and so make problem debts less likely to arise.

Beyond this, we need to tackle other underlying causes of lower income countries being so dependent on debt in the first place, such as tax avoidance and evasion, unfair trade rules and the climate emergency.