The world must not sleep-walk into another debt crisis

November 12th, 2019, Published in Articles: PositionIT

Trade wars, protectionism, and nationalist rhetoric are combining to weave the possibility of a nightmare debt crisis that could be worse than any previously experienced. Global borrowing is now at the highest levels since the 1950s – and history suggests we should take this as a warning that a debt crisis could be looming.

Were one to materialise, it could inflict greater dislocation on international financial systems and national economic stability than previously witnessed, especially in this highly uncertain environment characterised by the trade war and regional disintegration. This would be particularly tragic in view of the extraordinary global commitment to delivering Sustainable Development Goals, and as so many nations seem finally to be in earnest about tackling the causes and impact of the climate crisis.

The impact of a parallel crisis in global debt would derail this and could make much needed international cooperation on poverty and progress impossible. Governments would be diverted by the need to stabilise local economies devastated by unmanageable debt. Yet such a scenario can be averted.

It is no longer feasible for policies on debt, trade and other economic matters to be considered in isolation from the increasingly extensive impacts of climate change, which are becoming more frequent and more stark.

With interest rates at historically low levels, borrowing becomes an attractive proposition yet heightens the concomitant risk of debt ballooning to levels which are unsustainable over the longer term. This raises the possibility that countries which have “borrowed their way out of trouble” following a setback will eventually face severe debt distress. Preventing such eventualities is a global challenge which requires collective and coordinated responses.

The way to a stable and sustainable economic future is for developing and developed countries to work together on shaping the global debt rules which affect them all. The Commonwealth’s approach is to focus on the roles of creditor and indebted countries.

There have been instances of hidden national debt burdens, and this places responsibility on creditors as well as debtors. In countries where fiscal regulation is weak, debt may be acquired or accumulated in ways which are not transparent, and very seriously to the detriment of citizens. Those who provide credit in such circumstances are also culpable, and they too must be scrutinised and be made to bear responsibility – particularly as those who suffer the most pain from unsustainable debt and carry the greatest burden at times of crisis tend to be the poor and marginalised – those least able to cope.

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