17. July 2023

New Focus Paper: “Debt crisis not yet bad enough” – How creditors downplay the need to act

136 out of 152 countries in the Global South are at least slightly critically indebted, 40 of them very critically. Without urgently needed reforms of the international debt architecture, the latest wave of debt crises in the Global South cannot be solved. The leaders of the World Bank and the International Monetary Fund (IMF) have also repeatedly called for this.

Recently, however, the staff of the institutions has been cautiously moving away from the alarmist discourse of the leaderships and adopting more reassuring tones. This also applies to other actors in global debt crisis management such as the Paris Club, the World Bank or individual governments, including the German government. In April 2023, (current and former) IMF staff have now attempted to support this discourse through a more detailed study. In the study, they demonstrate that the situation of low-income countries today is still a long way from the dramatic levels of over-indebtedness of the last global debt crisis in the 1990s. The implicit message of this study is that comparably dramatic changes in dealing with debt crises, such as the far-reaching debt relief through the Heavily Indebted Poor Countries Initiative (HIPC) at the turn of the millennium, are not (yet) necessary. The study comes at a time when criticism of the G20’s Common Framework and the lack of debt relief is growing louder.

For political decision-makers, especially in G7 countries, the HIPC initiative and with it the realisation that action was taken far too late at the time, thus making the crisis unnecessarily expensive, was a “painful” process. The debt situation in the mid-1990s is therefore a politically significant reference point for today’s debate on how to deal with the debt of countries in the Global South.

This focus paper explores the question of whether the thesis of the study (“The situation of indebted countries in the Global South is less dramatic today than it was on the eve of the creation of the HIPC Initiative in the mid-1990s”) is tenable or whether this can be seen as a politically motivated discourse of the creditors.

Authors: Kristina Rehbein and Jürgen Kaiser

Publication: June 2023

Download: Focus Paper 10: “‘Debt crisis not yet bad enough’ – How creditors downplay the need to act”