S&P Global Ratings predicts longer debt restructurings as more countries face default risks this decade
S&P Global Ratings has warned that countries are likely to default more frequently on their foreign currency debt in the coming decade, primarily due to rising debt levels and increased borrowing costs.
As reported by The Globe and Mail, this forecast reflects concerns over the global weakening of sovereign credit ratings in the past ten years.
The report serves as a sharp warning as the world emerges from a series of sovereign debt defaults, even though wealthy creditor nations had earlier suggested that the risk of a global debt crisis was beginning to decline.
According to the report, “These factors quickly create liquidity challenges as access to financing dries up and capital flight accelerates. In many cases, this constitutes the tipping point where liquidity and solvency constraints become problematic for a government.”
The COVID-19 pandemic placed significant pressure on national finances, leading to seven countries defaulting on their foreign currency debt in 2020—Belize, Zambia, Ecuador, Argentina, Lebanon, and Suriname twice.
The situation worsened in 2022 and 2023, as a spike in food and fuel prices following Russia’s invasion of Ukraine led to defaults in eight more countries, including Ukraine and Russia. Since 2020, more than one-third of the 45 sovereign foreign currency defaults since 2000 have occurred.
S&P’s analysis of defaults over the past two decades highlights a growing reliance on government borrowing by developing countries to ensure foreign capital inflows.
However, when combined with unpredictable policies, lack of central bank independence, and underdeveloped local capital markets, these nations often struggled to repay their debts.
As capital flight intensified, balance-of-payment pressures mounted, foreign exchange reserves were depleted, and borrowing capabilities were cut off, creating a spiral that led to default.
The report also noted that debt restructurings now take significantly longer than they did in the 1980s, with major consequences for the affected countries.
“We also found that the long-term macroeconomic consequences are more severe for sovereigns that remain in default for multiple years, increasing the probability of further defaults down the line,” the report stated.
Sovereigns nearing default often saw interest payments approach or exceed 20 percent of government revenue in the year before default, with recessions and double-digit inflation worsening living conditions for citizens.
“Sovereign defaults have significant implications for economic growth, inflation, exchange rates, and the solvency of a sovereign’s financial sector,” the report concluded.
