Sovereign Debt Crisis Risk Monitor

Global sovereign debt levels have stabilized in recent years, with aggregate debt-to-GDP ratios declining slightly from pandemic peaks. However, the absolute level of sovereign debt remains at historically high levels, particularly in advanced economies where it averages 114% of GDP.

Debt trajectories are diverging across income groups. While advanced economies have begun to stabilize their debt ratios, emerging markets and low-income countries have seen continuing increases in debt-to-GDP levels. This divergence reflects differing access to capital markets, varying economic growth rates, and different fiscal consolidation capabilities.

The composition of sovereign debt has also evolved, with increasing reliance on domestic currency debt in emerging markets (now 62% of total sovereign debt), though foreign currency exposures remain significant. Low-income countries continue to have high exposure to foreign currency debt (65%), creating significant exchange rate vulnerabilities.

Rising interest rates have significantly increased the fiscal burden of sovereign debt, particularly for countries with large refinancing needs. Interest payments as a percentage of government revenue have reached alarming levels in several emerging and developing economies.

Ghana, Argentina, and Egypt face extreme interest payment burdens, with more than 18% of government revenue directed to debt servicing. This severely constrains fiscal space for essential public services and investment. Meanwhile, even advanced economies like the United States are experiencing rising interest burdens, with interest payments now consuming 12.4% of federal revenue.

The interest burden is particularly concerning when combined with weak economic growth prospects. Countries facing the "interest rate-growth differential" (where interest rates exceed economic growth rates) face debt dynamics that can quickly become unsustainable without substantial primary budget surpluses.

Our sovereign debt vulnerability assessment evaluates multiple factors including debt burden metrics, fiscal space, external position, debt composition, market access, and economic fundamentals to identify countries at elevated risk of debt distress.

The analysis identifies ten countries with high or extreme vulnerability scores, indicating significant risk of debt distress in the next 12-24 months. Ghana, Argentina, and Egypt demonstrate the highest vulnerability scores, with existing debt service challenges and limited market access.

A second tier of vulnerable countries—including Pakistan, Tunisia, El Salvador, and Kenya—face elevated risks but maintain some policy flexibility. These countries require careful monitoring, particularly as global financial conditions tighten and refinancing needs come due in 2025-2026.

Sovereign debt crises have become less frequent over recent decades, with the peak period of widespread defaults occurring during the 1980s debt crisis that primarily affected Latin America and parts of Africa. Institutional improvements, including stronger multilateral support frameworks and improved debt management practices, have contributed to greater resilience.

However, the current environment presents unique challenges compared to recent history. The combination of elevated debt levels following the pandemic, rapid interest rate increases, and a fragmented creditor landscape creates vulnerabilities that differ from previous periods of stress.

While institutional frameworks for dealing with sovereign debt crises have evolved, significant gaps remain. The Common Framework for Debt Treatments has shown limited effectiveness to date, and the rise of non-traditional creditors has complicated collective action approaches to debt resolution.