Sovereign Debt: A Critical Challenge

Overview and Objectives

The Covid-19 pandemic created an unprecedented combination of challenges: government-ordered lockdowns, dramatic economic downturns, instability in various markets and industries, and an historic surge in government spending on health and social needs. These events precipitated an urgent need for liquidity among emerging market economies and an increase in their debt burdens. Today, the earlier fear of a dangerous lack of liquidity has been replaced in large part by concerns about the ability of the international financial architecture to support countries with increasing levels of debt and uncertain access to capital. One worrisome aspect seems clear: Many countries will require debt relief in the next few years if they are to maintain or restore access to financial flows. Higher interest rates in advanced economies, and the United States in particular, could compound the difficulties of emerging market countries in servicing existing debt and refinancing maturing debt.