Policy Briefs

Addressing the Debt Crisis in the Global South: Debt Relief for Sustainable Recoveries

Task Force: Sustainable economic recovery

Authors:

Ulrich Volz ,

Kathrin Berensmann ,

Sara Burke ,

Kevin P. Gallagher ,

Stephany Griffith-Jones ,

Martin Kessler ,

Irene Monasterolo

Abstract

A debt crisis is looming in the Global South. High levels of public debt service and insufficient fiscal and monetary space are threating recoveries and impeding much-needed investments in climate resilience and the Agenda 2030. This policy brief makes seven recommendations for the G7 to address the debt crisis in the Global South and provide all countries with the opportunity to invest in sustainable recoveries: (1) Reinforce efforts to increase transparency of public and private sovereign debt. (2) Push a reform of the International Monetary Fund (IMF) and World Bank’s Debt Sustainability Analysis (DSA) to fully include climate and sustainability risks and investment needs. (3) Encourage the IMF to create an option for all sovereign debtors to request an updated DSA as a basis for negotiations with its public and private creditors. (4) Create legal safeguards for debt restructurings and limiting opportunities for holdouts to derail negotiation processes and outcomes. (5) Increase incentives for private creditor participation in debt reprofiling and restructuring, respecting the principle of comparable treatment of creditors. (6) Initiate a dialogue with sovereign debtor groups representing climate-vulnerable nations. (7) Assure policy coherence by fostering the alignment of new debt issuance with the climate and sustainability targets.