Countries like Sri Lanka loaded up on debt before and during COVID. Now, rising interest rates will make these debt loads more expensive — and chill growth that’s needed to help pay them off.
The south Asian island nation of Sri Lanka just defaulted on its debt. Its situation is not so different from a host of other lower-income nations — and there’s no reason to think others won’t share the same fate.In a sovereign debt crisis, the biggest victims aren’t the international creditors — but the regular people whose economy is stuck in a holding pattern while the government haggles over austerity and repayment schedules.
And with global markets so closely intertwined, even small, seemingly containable crises can reverberate in unpredictable ways, says Jeremy Mark, senior fellow with think tank the Atlantic Council and a former International Monetary Fund official. The war in Ukraine has made the already-precarious financial positions of many nations even worse, generating food and energy price shocks while interrupting trade and tourism.
Don’t forget government corruption : “Some observers argue Sri Lanka’s debt crisis is the product of the hubris, mismanagement and alleged venality of political elites including the Rajapaksa family,” as“The question a lot of people have is: Is this just the beginning of defaults?” notes Mark. “We're already seeing a slow moving crisis affecting some weaker countries. And there's nothing to say that this can’t widen, especially if we have a recession in the U.S.," Martin Muhleisen, formerly an IMF director, tells Axios.
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