WHY SOVEREIGN DEBT RISING IN DEVELOPING WORLD?

Biased sovereign credit ratings and steep interest rates are at work

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THE ANSWER to this question is often traced to the oil price rise of the 1970s, which resulted in a financial squeeze in oil-importing developing countries. Arab oil wealth was deposited in Western bank vaults. These “petrodollars” provided much of the cash lent to borrowers in the developing world. This was also advantegeous to the Western economies. “Recycling” oil money to the developing world meant that they could keep buying Western exports, despite bigger oil bills, and thus help keep numerous factories in Europe and North America open, staving off a descent into recession. During the 1970s, private commercial banks in the West began to overtake official lenders. At the height of their lending in 1982, banks were lending $63 billion a year to the developing world, nearly twice the amount lent by official government sources. The economies of several borrowing countries grew rapidly during the 1970s. But the 1980s saw a recession in industrialised countries. Economic activities slowed down and interest rates on bank loan went up. Developing countries which could not pay their earlier loans now had to take more and more loans just to pay interest on the loan they had taken. An example of this vicious debt trap is Brazil; between 1972 and 1988, the nation paid $176 billion as interest on a debt of $124 billion to industrialised countries.

Cut to the 2020s. The situation has not changed much in the past 40-odd years.

HIGH COST OF BORROWING