A global debt crisis is looming

[WASHINGTON] The world is edging closer to a global debt crisis. The Iran war may have been the spark, but dry tinder has been piling up for quite a while.

After a decade of debt accumulation, higher interest rates and growing refinancing needs have left the global economy increasingly exposed to shocks. And with ongoing conflicts driving up energy prices, renewed inflationary pressures are testing the limits of the existing debt architecture.

The outlook is especially worrying for developing countries, where public debt totalled US$35 trillion in 2025, up 10.5 per cent in the space of a year.

The United Nations Development Programme has said that the “median developing country now spends about 9.5 per cent of government revenue on interest payments, the highest share in 25 years”.

The International Monetary Fund (IMF) records 32 low-income countries in debt distress or at high risk of it. Yet, restructurings with private creditors take an average of 2.5 years, twice the length of the process before the Covid-19 pandemic.

The core problem is not the amount countries owe, but the cost and unavailability of fresh financing. Effective interest costs are rising faster than many countries’ capacity to service their debts with export earnings and fiscal revenues, and this gap could widen further.

Even countries whose headline debt-to-gross domestic product ratios have stabilised may face severe liquidity pressures if they are forced to roll over large amounts of debt at much higher interest rates.

This problem is not confined to developing countries.

The Organisation for Economic Co-operation and Development’s total interest bill has surpassed US$2 trillion.

The US is absorbing enormous amounts of capital through rising public borrowing, artificial intelligence hyperscalers are increasingly turning to bond markets themselves, and higher defence spending and large new fiscal commitments threaten to fuel further upward pressure on interest rates.

When the world’s largest borrower can borrow on an almost limitless scale, countries with far smaller financing needs can find themselves paying the price.

Global debt architecture

This feature of the global debt architecture is unfair and unsustainable. Countries that borrowed cautiously can still be squeezed by decisions made elsewhere.

Developing economies are facing an impossible choice of either paying more to refinance existing debt or cutting spending on health, education, infrastructure and productive investment.

The solution cannot be austerity alone. Debt sustainability ultimately depends on the productive capacity that generates tomorrow’s growth, revenues and foreign-exchange reserves. Fiscal discipline matters, but so does protecting the public investment needed to make debt sustainable.

The good news is that the international community is not starting from scratch.

Several reforms agreed in 2025 in Sevilla at the 4th International Conference on Financing for Development have already achieved proof of concept.

Debt-pause clauses are being standardised; innovative debt-for-development swaps have been tested; IMF and the World Bank have just approved changes to their debt-sustainability framework; collective-action clauses are becoming more widespread; and a new Borrowers’ Platform is giving debtor countries a stronger voice.

Markets are starting to take notice. Moody’s now considers the option to pause debt servicing as credit-positive, indicating that it will not treat activating a contract’s pause clause as a default. With this single change, one of the main reasons for policymakers’ hesitation to use such clauses has disappeared.

Nonetheless, our own expert group has identified a critical gap in implementing the Sevilla reforms: The necessary instruments exist, but they are not yet standard practice, as detailed in the Expert Group on Debt’s October 2026 implementation report.

This could become a serious problem, given current macroeconomic conditions.

In an emergency, countries cannot wait years for new provisions to be embedded in contracts or legislation. They urgently need a process for temporarily suspending debt servicing, along the lines of the G20’s pandemic-era Debt Service Suspension Initiative.

This option should be made available for any countries facing acute pressures, with multilateral development banks (MDBs) encouraged to participate. By offering immediate liquidity relief, we can prevent today’s refinancing problem from becoming tomorrow’s solvency crisis.

At the same time, concessional finance must be substantially scaled up and made more predictable.

Given that additional sources of lending and refinancing are central to debt sustainability, MDBs should expand concessional resources, guarantees and countercyclical financing. The wider community of public development banks – now united through Finance in Common – should be mobilised as part of the response.

Wherever and whenever it is feasible, countries should also diversify the currencies in which they borrow, strengthen domestic debt management and liquidity buffers, and develop financing strategies that better account for exchange-rate and refinancing risks.

Liquidity stress versus insolvency

Finally, debt-sustainability analyses must distinguish liquidity stress from insolvency and account for higher-for-longer interest rates, volatile export earnings, fiscal constraints and the value of investments that strengthen resilience and productive capacity.

The recently approved review of the IMF-World Bank Debt Sustainability Framework for Low-Income Countries (LIC-DSF) is a step in the right direction.

It will push both institutions towards longer-term assessments, bring domestic debt into the analysis, and introduce liquidity indicators (gross financing needs and interest payments relative to revenue) to separate liquidity stress signals from insolvency.

But these changes will apply only from mid-2027, and they will not cover countries that typically have access to international capital markets. That means the institutions responsible for critical reforms have a choice.

The G20, especially under the UK’s presidency in 2027, can turn its stated commitment to facilitate low and middle-income countries’ debt coordination into practical reforms to the Common Framework for Debt Treatments.

The IMF and World Bank can accelerate implementation of their revised LIC-DSF and extend it to market-access countries. Creditors and borrowers can turn debt swaps from one-off innovations into repeatable instruments. And borrowing countries can build the Borrowers’ Platform into a durable institution.

The architecture agreed in Sevilla was built for global shocks. The shocks have now arrived, but the implementation has not. Countries already carrying the heaviest financing burdens cannot afford to wait for reforms to catch up. PROJECT SYNDICATE

This commentary is signed by: Remy Rioux, CEO of the Agence Francaise de Developpement; and Yan Wang, senior academic researcher at the Boston University Global Development Policy Center.

The writers are co-chairs of the UN Secretary-General’s Expert Group on Debt. Paolo Gentiloni is a former European commissioner for economy; Trevor Manuel is a former minister of finance of South Africa; Mahmoud Mohieldin is the UN special envoy on financing sustainable development.