With its shuttered banks, furious public protests and iconoclastic politicians, the plight of Greece, brought to its knees by a crippling debt burden, has been gripping and heartbreaking in equal measure: a full-blown sovereign debt crisis on the doorstep of some of the wealthiest countries in the world.
Yet new analysis by the Jubilee Debt Campaign reveals that Greece’s plight is far from unique: more than 20 other countries are also wrestling with their own debt crises. Many more, from Senegal to Laos, lie in a debt danger zone, where an economic downturn or a sudden jump in interest rates on world debt markets could lead to disaster.
One of the lessons from the 2008 crash was that hefty debt levels can leave countries vulnerable to sudden shifts in market mood. But Jubilee reports that the rock-bottom interest rates across major economies, which have been a key response to the crisis, have in many cases prompted governments, firms and consumers to go on a fresh borrowing binge, storing up potential problems for the future.
Judith Tyson of the Overseas Development Institute thinktank says the flipside of the latest round of borrowing has been investors and lenders in the west looking for bigger returns than they could get at home, a process known in the markets as a “search for yield”.
“Since 2012, there’s been a huge increase in sovereign debt, in Africa in particular,” she says. Some of the countries involved were beneficiaries of the debt relief programme that G8 leaders signed up to at the Gleneagles summit in 2005. “They were given debt relief with the idea that it would give a clean slate to go forward,” Tyson says.
She warns that a number of countries have since “loaded up” on debt – and while some governments had invested the money wisely, diversifying their economies and improving infrastructure, others have not. She points to Ghana, in west Africa, where a sharp increase in borrowing has been spent on what she calls “pork-barrel politics. They’ve spent it in a frivolous way.”
Jubilee’s analysis defines countries as at high risk of a government debt crisis if they have net debt higher than 30% of GDP, a current-account deficit of over 5% of GDP and future debt repayments worth more than 10% of government revenue. “We estimate that 14 countries are rapidly heading towards new government debt crises, based on their large external debts, large and persistent current account deficits, and high projected future government debt payments,” it says.
One vulnerable example is Tanzania, a country that suffered a severe debt crisis in the 1990s. In many ways, it has been a success story since receiving international debt relief in 2001 and 2006, allowing repayments to fall from 27% of government revenue to 2%. Child mortality has dropped; fees for primary schools have been abolished; more children are completing their schooling.
Yet borrowing has steadily risen since 2009, including from multilateral donors such as the World Bank, which tend to offer aid in the form of cheap loans rather than handouts. It’s a measure of success in some ways that the country managed to raise money from private investors in the capital markets by issuing bonds.
But Tanzania’s economic growth, and government revenues, are heavily dependent on exports of gold and precious metal ores, which have fallen in price in recent months. Jubilee’s numbers show that slower than expected growth could see debt repayments shoot up from an expected 10% of government revenue in 2018 to double that – well into the danger zone.
Falling commodity prices as growth in China slows, as well as the strong dollar – a danger because much of African governments’ borrowing is dollar-denominated – will create pressures on many other developing countries.
Ethiopia, where ministers from around the world will gather this week to discuss how to fund the next wave of international development, is another country whose debt levels have been steadily rising, and which could prove vulnerable. Mongolia, which has welcomed foreign investment to exploit its huge natural resources, including coal, has plans to borrow $1bn over the next year; but with its currency, the tugrik, declining sharply, it could be hit hard if the economic boom of recent years comes to an end.
“Current levels of lending to impoverished countries threaten to recreate debt crises,” warns Jubilee’s policy officer Tim Jones.
But it’s not just in the developing world where low interest rates and the legacy of the crisis have increased the temptation to paper over the cracks with borrowed money. Jubilee found that net cross-border lending worldwide, including the private sector as well as governments, has increased from $11.3 trillion in 2011 to $13.8tn in 2014 – and forecasts that it will reach $14.7tn this year.
That’s a 30% rise in just four years and a sign that the “global imbalances” many experts saw as a key cause of the crisis are far from resolved. “The world is still very out of kilter,” says Russell Jones, economist at Llewellyn Consulting.
The lacklustre global recovery has also been a factor in driving up debt levels as policymakers seek to restore pre-crisis living standards.
“All this debt is probably being accumulated because other sources of growth are increasingly in decline,” says Russell Jones. “There’s a lot of pressure on governments and central banks to keep things going at the old rate.”
As Greece’s government found, debts that seem manageable one day can quickly become unsustainable the next if conditions in financial markets or the economy abruptly shift.
Northern Rock, Britain’s bailed-out mortgage bank, made the same discovery in August 2007 when, as its then boss Adam Applegarth put it, “the world changed”. Many experts believe that if, as expected, the US Federal Reserve starts to increase interest rates from their record low later this year, that could act as the catalyst for a shake-up in global debt markets that could have far-reaching consequences.
Tyson points out that many loans taken out by African governments in recent years carry fixed interest rates for five years. When they come to be refinanced, it may have to be at much higher rates. As US rates increase, she says, investors will be keen to pull their money out of smaller emerging economies: “We will see a sharp reversal of capital flows. Some of these countries are quite fragile.”
In its twice-yearly report on the global economy last month, the World Bank warned that developing countries facing up to the prospect of the flood of cheap money being turned off should be “hoping for the best, preparing for the worst”.
Russell Jones says: “When the Fed has a very itchy trigger finger, you have the potential for some fairly serious issues.”
Countries at high risk of government external debt crisis
■ Cape Verde
■ Sao Tome e Principe
Countries currently in government external debt crisis
■ Costa Rica
■ Dominican Republic
■ El Salvador
■ The Gambia
■ Marshall Islands
■ Sri Lanka
■ St Vincent and the Grenadines
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