The debt cycle that now threatens a range of low- and middle-income countries will not find an easy exit.
Sovereign debt crises are not new. What is new — or rather, newly acute — is the configuration of creditors that developing countries now face when they approach the point of distress.
For decades, the architecture of sovereign debt restructuring rested on a workable, if imperfect, set of assumptions. Most creditors were either multilateral institutions with established norms or Paris Club members — primarily wealthy Western governments — who could coordinate. Private creditors were a complicating variable, but they could be managed through the legal mechanisms that had evolved since the Latin American crises of the 1980s.
That architecture has fractured. Chinese state lending, which expanded dramatically through the Belt and Road era, does not operate within the Paris Club framework. Chinese creditors have historically resisted collective restructuring, preferring bilateral negotiations that preserve their own terms. This is not irrational from Beijing's perspective. But it creates a collective action problem that has no clean resolution.
When Zambia, Ghana, Sri Lanka, and others entered debt distress, the restructuring processes dragged precisely because of this fragmentation. The creditor coordination that the system required was the creditor coordination that the system could no longer reliably produce.
The G20 Common Framework, announced with considerable enthusiasm in 2020, has delivered little at speed. The mechanisms for bringing disparate creditors into structured negotiations have proven weaker than hoped. Debtor countries have suffered extended uncertainty while creditor committees have struggled to coordinate.
The debt cycle that now threatens a range of low- and middle-income countries will not find an easy exit. The institutional infrastructure for orderly resolution is under-built for the current creditor landscape. Until that changes — which requires political will from parties with conflicting interests — distressed countries will face prolonged uncertainty, compressed fiscal space, and the economic contraction that flows from both.
