A global debt crisis is looming, and it threatens the living standards of rich countries as well as those in poor ones. Yet, in an election year, politicians are ignoring the issue and promising profligate spending that will at least jack up inflation and perhaps trigger a new financial crisis.
The root causes of the problem lie in bad economic policies and development choices that go back decades, starting with the Organization of Petroleum Exporting Countries’ quadrupling of oil prices in 1973. That windfall gave developing countries the funds to invest in commercial banks, which, seeking returns for their capital, made loans often without carefully assessing how the money would be used. The loans were sometimes misallocated to armaments, failed or inappropriate large-scale development projects, and private projects that benefited only government officials and the wealthy elite.
When a person or a company finds that it cannot meet its financial obligations over time, it is able to file for bankruptcy and the courts decide whether to restructure or discharge its debt. But when countries get in over their heads, there is no comparable process.
A long era of extraordinarily low interest rates encouraged many governments to spend beyond their means, creating a debt overhang that is a growing threat with each natural or man-made shock. Averting the crisis requires prudence, structural reforms to boost growth, and greater efforts to develop local capital markets. It also calls for a rethink of the terms under which rich countries lend to poor ones, including through the IMF.
