By the beginning of 2026, global sovereign debt had reached unprecedented record levels, with debt-to-GDP ratios exceeding 100% in many developing and emerging economies, and even surpassing 150% in some cases. This rapid increase, accelerated by the COVID-19 pandemic and the 2022–2024 energy and food crisis, has become an unbearable burden on vulnerable economies, forcing them to make painful economic choices.
The primary cause: High interest rates.
The main factor exacerbating the crisis is the continued high interest rates set by major central banks—most notably the US Federal Reserve—to combat inflation. These rates have nearly doubled the cost of debt servicing (interest payments) in just three years. The consequences include:
- A rapid depletion of foreign exchange reserves.
- A collapse in the value of local currencies against the dollar (in some countries, the decline has reached 40–70% since 2022).
- A shift in national budgets from productive spending (education, health, infrastructure) to debt servicing.
Debt Not Going to Productive Investment
One of the most dangerous aspects of the crisis is that the bulk of new debt was not directed toward long-term productive projects, but rather used to bridge financing gaps resulting from rising energy and food prices, and to compensate for declining tax revenues. This means that countries did not generate future repayment capacity, but rather increased the debt cycle without corresponding economic growth.
IMF Warnings: More Than 40% of Low-Income Countries at Extreme Risk
- The International Monetary Fund issued a stark warning in its latest report (January 2026):
- More than 40% of low-income countries are now experiencing severe debt distress.
- Around 20 countries are nearing the point of complete financial collapse or default.
Without a radical and rapid debt restructuring, we could witness a series of defaults in 2026–2028, similar to the 1980s crisis but on a much larger scale.
China as a Central Player: The Complexities of Bilateral Debt
China has become the world's largest bilateral creditor, holding a significant share of the debt of African, Asian, and Latin American countries. This has created a major conflict with the Paris Club (the group of official Western creditors):
- The Paris Club demands a comprehensive restructuring that includes debt reduction.
- China typically refuses debt reduction, preferring instead to extend repayment periods or convert the debt into investment projects (such as infrastructure).
This disagreement leaves debtor countries in a vulnerable position: if they agree to the Paris Club's terms, they risk losing Chinese support. If they agree to China's terms, they risk being cut off from IMF assistance.
Proposed Solution: Debt-for-Climate Swaps
Among the most popular solutions currently being discussed are:
- Debt-for-Climate Swaps—a portion of the debt is reduced in exchange for the country's commitment to implementing major environmental projects (forest protection, renewable energy, environmental rehabilitation).
- This formula achieves three objectives simultaneously:
- Debt relief.
- Financing the energy transition and preserving biodiversity.
- Giving creditors (especially Western ones) a political and environmental justification for debt relief.
In short: This is not just a financial crisis, but an existential one.
High sovereign debt in emerging economies is not merely a matter of figures on financial tables; it is a direct threat to sustainable development, social stability, and even food and energy security. Without swift and coordinated international intervention—combining genuine restructuring, climate finance, and domestic reforms—we could witness a series of financial collapses in the coming years, redrawing the map of poverty and political stability in the developing world.
The question now is not "Will some countries collapse?" but when, and what the human and economic cost will be if we do not act quickly.
