Total global public debt reached 93.2% of world GDP: how it will affect the global economy (continued)

After a year that passed yesterday, IA Fact stated, that global public debt has reached 93.2% of world GDP, having increased significantly due to the fiscal costs of overcoming the consequences of the covid pandemic, which has created serious challenges for macroeconomic stability. Particularly vulnerable are developing countries, where debt service costs exceed investments in education and health care, as well as developed countries, and even the United States, where the debt limit has become the subject of political conflicts. Consequences of possible defaults can be financial turmoil, loss of confidence in national currencies and the threat of a slowdown in the global economy, which requires strategic management of debt obligations to avoid a crisis. Here are some examples from economic history that illustrate this.

The most powerful default in the history of Argentina

In 2001, Argentina announced the biggest default in history by $100 billion, which led to an economic crisis, mass unemployment and loss of investor confidence. Today, the country is again looking for a way out of its economic problems, now under the leadership of President Miley.

Last offers radical reforms, including the dollarization of the economy and a sharp reduction in public spending. He seeks to stop inflation, but these actions are already causing social tension. Many people fear that the reforms could increase poverty and instability.

At present, the country is going through a risky “an economic experiment“. The question is whether these actions will help solve the crisis or create new problems. Past mistakes, like the aforementioned default, show how important it is to strike a balance between reform and caring for people. That is, it is important to take into account the lessons of the past in order to avoid new problems in the future.

The 2010-2015 Greek crisis: how the country avoided default

Greece was on the brink of bankruptcy in 2010 due to large debts. It received more than €260 billion from the EU and the IMF in exchange for tough austerity measures: cuts in salaries and pensions, tax hikes and cuts in public spending.

These steps hit people hard. Unemployment reached 27%, the economy shrank by a quarter, and poverty increased sharply. Mass protests began in the country. The crisis also changed politics – traditional parties lost support and new leaders came to power, including Alexis Tsipras, who promised to abandon austerity but failed to do so.

Greece avoided default, but paid for it with years of economic decline and social tension. Recovery began only after 2018, although debts are still high.

Russia’s 1998 Default: What Happened

In August 1998, Russia defaulted, meaning it stopped paying its debts. This happened due to falling oil prices, high debts, a weak economy after the collapse of the USSR and the financial crisis in Asia. The government devalued the ruble, stopped payments on domestic bonds and announced a moratorium on foreign debts. The economy took a serious hit: prices rose, banks closed, people lost their savings, and living standards plummeted.

Social tensions rose, the government resigned, and the country lost investor confidence. Recovery began a few years later thanks to rising oil prices and political stabilization. This crisis became a lesson for Russia, showing what financial instability and dependence on external factors lead to.

Mexico’s debt crisis

In 1982, Mexico defaulted on its debts, causing a major economic crisis in Latin America. The main reasons were the rise in interest rates in the US, the drop in the price of oil, which was the main source of the country’s income, and the large loans that Mexico took out earlier. Mexico announced that it could not pay its debts, causing panic among international creditors. This led to the devaluation of the peso, rising prices and falling living standards.

To save the economy, Mexico received help from the IMF and the United States, but it had to carry out tough reforms, cut costs and open the market to foreign capital. This crisis also affected other countries in the region, starting a period of economic hardship known as the “lost decade”. Mexico was able to stabilize the situation, but the process was long and painful.

That is, the financial crisis in Mexico in 1982 greatly affected the economy and people’s lives, and it took a long time to recover.

These examples demonstrate that defaults, or even the risk of defaults, undermine trust in governments, provoke economic downturns, and have long-lasting consequences. Successfully avoiding defaults usually depends on quick political compromises, foreign aid or structural economic reforms. This is an important lesson for any country facing the threat of financial instability.

Why is it important to have a structured national debt management plan

In order for countries to avoid problems due to public debt, experts advise several simple but important steps. The first thing is to have a clear plan on how to manage the debt. This will allow you to spend less money on interest payments and gradually reduce the total debt.

Debt servicing in the national currency helps to avoid risks associated with changes in the exchange rates of the dollar, euro or other currencies. Another way is to stretch the debt payments over a long period of time and spread them evenly over time to avoid situations where you need to pay large amounts at once.

The development of the domestic financial market is important. If the government borrows money in its own currency, for example through the sale of bonds, it reduces dependence on foreign loans and makes the economy more stable.

In addition, it is useful to cooperate with the IMF or the World Bank, which can provide loans on favorable terms. But it is important that this money is used for the development of the country, and not only for closing the current holes in the budget.

Another important step is to notice possible financial problems in advance. For this, the state should create monitoring systems that will help solve difficulties before they turn into a crisis.

Thus, if the country plans its actions, develops the domestic market, cooperates with international partners and notices risks in advance, it can avoid debt crises. This makes the economy stronger and allows more efficient use of money for the benefit of citizens.

Why debt restructuring is needed

This is a way to help countries that cannot pay their debts to negotiate with creditors to ease the conditions. This may mean reducing the amount of debt, increasing the time for payments or reducing the interest. But the success of such measures depends on how they are implemented and whether the country is ready to make changes in the economy.

For example, Argentina has changed the terms of its debts many times. In 2020, she agreed with creditors to facilitate payments, but due to political instability and a weak economy, the problem was not fully resolved.

Greece in 2012 carried out one of the largest restructurings in the world, partially writing off debts and lowering interest rates. This provided temporary relief, but the harsh economic measures demanded by creditors slowed the country’s development and sparked protests.

Iceland recovered quickly after the 2008 financial crisis. The government wrote off part of the debts of banks and the population, and also introduced strict control over the movement of money. Thanks to this, the country’s economy quickly stabilized.

In 2015, Ukraine was able to agree with its creditors on writing off part of the debt and made payments dependent on economic growth. This reduced the pressure on the budget, but due to the unstable economy, the country was not able to take full advantage of these benefits.

Debt restructuring can ease the country’s financial situation, but it is not enough if reforms are not carried out to develop the economy. Successes like Iceland’s show that it is important to act quickly and maintain the internal market. Instead, the experiences of Greece and Argentina remind us that without long-term change, problems can return.

Different approaches to public debt management in different countries

Public debt is a challenge for many countries, but each of them has its own approach to managing this problem. Yes, the US has a debt that exceeds the entire volume of its economy, but thanks to the fact that the dollar is the main currency in the world, the country easily finds investors. However, they have to regularly increase the debt limit, which indicates the need for a long-term solution to the problem.

Japan has an even bigger debt – twice the size of its economy, but almost all of this debt belongs to the Japanese themselves. This reduces risks, and low interest rates and central bank support allow the country to remain stable.

Greece depends on external creditors, primarily the EU and the IMF. It experienced a severe financial crisis in the 2010s, and now its debt is more than 170% of the economy. In order to receive aid, Greece had to implement tough reforms.

Argentina also has a large debt, but often cannot pay it on time. Due to frequent defaults, it is difficult to attract new investors, and the economic situation in the country remains unstable.

Germany shows the opposite approach: its debt is only 60% of the economy. It strictly controls expenses and takes loans only in important cases, for example, during crises. Thanks to this, its economy remains strong.

China has about 70% of its economy in debt, but almost all of that money stays inside the country. They are used for infrastructure projects that contribute to economic growth.

So each country chooses its own approach to remain stable despite the challenges of debt.

Tetyana Viktorova