During the coronavirus crisis, governments have raised massive debt in order to combat the health emergency. However, many countries of the Global South already had high levels of public debt before the coronavirus crisis. Correspondingly, we may witness a new global debt crisis soon. Led by the G20, the IMF and the WB, creditor governments have reacted to this problem by temporarily relieving low-income governments from debt service. The question is whether this is enough or whether they have to permanently write off some Southern debt. International Political Economy scholarship provides us with a number of analytical instruments to tackle this question.

Why do governments get into debt crises? Between original sin and export competition

Taking up public debt is not necessarily a bad idea for countries of the Global South. Processes of economic catch-up often require huge amounts of public funds, often much higher amounts that are available domestically via tariffs, taxes and other public sector sources. Correspondingly, governments sell securities and bonds in order to raise additional resources. Depending on the income group of the country, governments address different sources for foreign debt. Upper-middle-income countries usually have a good access to international capital markets; that is, private creditors. For lower-middle and particularly low-income countries, both international organizations – in particular, multilateral development banks such as the WB – and Northern governments (via bilateral cooperation) are more important sources of loans.

In most cases, debt is issued in the currency of the debtor country. Other governments, however, have denominated their debt in foreign currencies (for example, the US dollar), due to the need to pay imports with these currencies. Moreover, the interest rates they have to pay for debt issued in, for example, US dollars is considerably lower than for debt in their own currency, because creditors do not have to face the risk of a devaluation of their credits denominated on the debtor country. The latter risk, however, is shifted to the debtor-government side. If the currency of the latter depreciates against, for example, the US dollar, its debt service (calculated in national currency) becomes much heavier. Serving huge foreign-denominated debts with a strongly depreciated currency puts a heavy strain on these economies. Due to this risk, taking up debt in foreign currency is called ‘original sin’.