The current international debt crisis is unlike previous financial and economic crises, which struck suddenly. Experts backed by various developments and economic indicators, which I discussed in previous articles, saw this one coming.

Now the painful realities are bearing out their warnings. But despite the magnitude of the losses being sustained by the developing countries, this is a silent crisis, which also sets it apart from previous debt crises.

There are two reasons for the international community’s jarring silence in the face of the dire impacts of the debt crisis. The first has to do with changes in the creditor structure. Whereas loans from the developed countries that make up the Paris Club once constituted 40 per cent of total public debt in the developing countries, that ratio has since dropped to less than a quarter of this figure.

Consequently, debt-rescheduling processes have grown much more complicated. At the same time, major creditor banks headquartered in the developed countries and with influential shareholders have curtailed lending to the developing nations to the bare minimum. The loans they do make come with provisions to protect the banks’ financial positions. This also distinguishes the current crisis from its predecessors.

The second reason for the silence is that the developing countries, though crushed by debt, will do anything to avoid the complex and hazardous path they would have to pursue if they decided to default and ask for rescheduling from their new creditors, which are international bond holders and countries that do not belong to the Paris Club.

They are also loath to take any action that might prompt the international rating agencies to downgrade their credit ratings. Therefore, they prioritise servicing their debts over spending on education, healthcare, and other essential public services. Their sole purpose in so doing is to have continued access to the loan market, as though being unable to take out new loans would be a fate worse than death.

Many initiatives have been proposed at various levels to remedy the debt crisis. I will only present a rough sketch of these initiatives here, which fall into two categories.

In the first category are morally inspired initiatives founded on principles of humanitarian justice. The Nobel-Prize winning economist Esther Duflo holds that high emissions-producing rich countries not only harm the climate but also inflict untold damage and climate-adaptation costs on the developing countries. She estimates that the developed nations produce about 14 billion tons of surplus carbon emissions a year.

Using the economist Michael Greenstone’s estimate of $37 per ton of carbon emissions, she has calculated that the developed nations owe a “moral debt” of more than $500 billion annually to the developing nations. In order to pay this, the developed nations should levy carbon taxes and other climate-related taxes on income and wealth, and the sums collected should be channelled into funds that would alleviate the developing nations’ debts and address their climate adjustment needs simultaneously.

To the foregoing type of moral initiative, we can add the appeals of Roman Catholic Pope Francis. The most recent action in this regard was a meeting, in which I took part, on “The Debt Crisis in the Global South” held in the Vatican on 5 June.

The purpose of this was to stimulate a drive to write off the debts of the poorest countries in keeping with the spirit of the Vatican Jubilee which will occur in 2025.  Among the customs of the Jubilee, debt forgiveness, in the opinion of the Vatican, is a moral obligation because debt is not just a political and economic concern, but also a moral one in view of its profound impacts on the lives and livelihoods of millions.

As the Pope observed in his address to the participants at the meeting, “in the wake of mismanaged globalisation, and in the wake of the pandemic and wars, we find ourselves faced with a debt crisis that mainly affects the countries of the Global South, causing misery and distress, and depriving millions of people of the possibility of a dignified future.”

The second category of initiatives are calls for reform requiring international cooperation. They include initiatives such as the UN Secretary-General’s Initiative for Sustainable Development, the Bridgetown Initiatives (of which there are three versions) endorsed by Barbados Prime Minister Mia Mottley, the Paris Pact for the People and the Planet, which emerged from a summit convened by French President Emmanuel Macron, the V20 Agenda, which includes 68 of the world’s most climate-vulnerable countries, and the Nairobi Declaration.

What these initiatives have in common is their inclusion of provisions to address the debt crisis of the developing nations. They variously call for activating the G20 framework for debt treatment, debt-forgiveness and debt-service deferrals under extreme circumstances, changing the Bretton Woods institutions’ analytical framework for debt sustainability, combining all creditors (whether members of the Paris Club, emerging markets, or the private sector) in restructuring agreements, reducing or deferring add-on costs on loans from the International Monetary Fund (IMF), promoting the use of financial innovation tools to reduce credit risks and insurance costs, and revising the approach and methodology of credit-rating institutions.

Even presuming, very optimistically given the current geopolitical conflicts and tensions that are raging across the world, that all these initiatives could be implemented, they would only mitigate the most arduous impacts of debt on the poor and shrinking middle classes of the developing countries.

They would not remedy the roots of the crisis and prevent its recurrence. The real remedy, at the country-level specifically, is to reform the lopsided approach to financing growth and development, an approach that is excessively reliant on indebtedness.

This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.

* A version of this article appears in print in the 25 July, 2024 edition of Al-Ahram Weekly