Introduction: Emerging Issues in Sovereign Debt

Indebtedness has long played a role in the struggle of countries in the Global South to achieve economic and social development. In the 1980s, Latin America saw a period of negative economic growth, due in large part to the increasing burden of debt service following the free availability of credit in the prior decade. By the late 1980s, it was common to hear references to la deuda impagable—debt that was so high as to be unpayable. In 1991, the economist Xabier Gorostiaga, S.J., noted that Latin America’s debt service payments alone were 80 percent more than the total amount of foreign investment coming into the region¹—a significant contributor to the growing consolidation of wealth in the Global North, alongside the worsening of extreme impoverishment in the Global South, which he characterized as a “crisis of civilization.”

The policies of the Washington Consensus, including austerity programs imposed by the International Monetary Fund (IMF) and other creditors, compelled states to cut spending on health, education, and social needs, and many borrowers were obliged to sell off state assets, including infrastructure. In some cases, state assets were not only privatized but privatized transnationally, with foreign entities coming to own the debtor country’s major industries and infrastructure.

In response to the inability of debtor states to meet their payment obligations, Paris Club creditors—an informal group of primarily Western governments engaged in lending to states—in collaboration with international financial institutions such as the World Bank and IMF generally respond by restructuring the debt. However, these restructurings, more often than not, are framed in a way that favors creditors. While the borrowing states may no longer be officially in default, the overall burden of debt is unabated and there is little fiscal relief for the borrower states.

Today, the situation is no less urgent than it was two decades ago. The global distribution of wealth is increasingly inequitable, and debt continues to be a vehicle by which wealth is transferred from South to North, while doing little to fund effective economic development. In the early 2000s, as commodity prices climbed and some debt relief was available, many developing countries were able to reduce their indebtedness.² But in the face of the 2008 financial crisis, and the greater availability of capital, developing countries took on even larger amounts of new debt. The total global debt is currently greater than in 2007, before the Great Recession. And the problem is not only the absolute amount of debt but the debt burden, that is, the amount of debt relative to the country’s economy.

In terms of debt as percentage of GDP, between 2007 and 2019, that figure increased by 23 percent. In emerging economies, the amount of debt went from 35 to 54 percent of GDP.³

Among heavily indebted poor countries (HIPCs), the ratio of interest on public debt relative to revenue has climbed steadily in the last decade, due to both higher interest rates and increased debt. The IMF reported that between 2013 and 2019, the ratio of debt service to revenue in HIPCs increased by more than one-third.⁴

The pressure brought to bear on an economy is measured in part by the key indicators of liquidity and solvency. The United Nations Development Programme (UNDP) sees signs of concern based upon indicators of both liquidity and solvency. Liquidity is measured by total debt service payments on public and publicly guaranteed debt, as a percentage of the country’s revenues. Looking at data for 112 countries in the developing world, in 2019, eighteen countries had breached their liquidity threshold, and by 2020, twenty-six countries had done so—nearly a quarter of the countries for which data was available. The indicator for solvency was equally concerning. Solvency was measured by total public and publicly guaranteed debt as a percentage of GDP. By this measure, 37 countries in the UNDP sample had breached their solvency threshold in 2019; by 2020, this increased to 46—over 40 percent of the countries in the sample. In 2019, there were 12 countries in breach of both their liquidity and solvency thresholds; by 2020, this had increased to 21 countries.⁵

These indicators show why it is that a growing number of countries in the developing world are edging closer to “debt distress”—when “a country is unable to fulfill its financial obligations,” such as debt payments⁶—and in some cases, default. According to the IMF and World Bank, 60 percent of low-income countries “are at or near this point.”⁷ This in turn compromises a country’s future access to capital markets. It also undermines a developing country’s ability to meet the basic and urgent needs of its population, as articulated, for example, in the Sustainable Development Goals. As the Gates Foundation noted, the COVID-19 pandemic has further undermined progress on basic development goals in the Global South.⁸ According to the World Economic Forum meeting in Davos, held in May 2022, the IMF estimates that “at least 100 countries will have to reduce spending on health, education, and social protection” in order to meet their debt payments.⁹

In recent years, we have seen calls for substantial reform from organizations such as the African Forum on Debt and Development and La Red Latinoamericana por Justicia Económica y Social (LATINDADD) (Latin American Network for Economic and Social Justice). With renewed debt pressure in light of the COVID-19 global pandemic, there have been some limited debt service suspension initiatives. However, suspension is only a short-term fix. Short of debt forgiveness, these attempts to address the crisis have yielded only modest results relative to the magnitude of the problem.

Along the lines of the essays in this roundtable, there have been critiques of the ongoing debt crisis from many quarters, such as the African Sovereign Debt Justice Network and the Jubilee 2000 campaign. Moreover, Pope Francis, in an address to the United Nations General Assembly in 2015, maintained that international financial institutions operating in the Global South "...should care for the sustainable development of countries and should ensure that they are not subjected to oppressive lending systems which, far from promoting progress, subject people to mechanisms which generate greater poverty, exclusion and dependence.”¹⁰

The kinds of solutions for the debt crisis are, to a large degree, circumscribed by how we conceptualize debt. If we only understand debt as based on contract, then we implicitly accept a set of assumptions: that the parties are acting freely, that their representatives are authorized agents, that a party is obligated to perform its contractual commitments, and that the counterparties bear no responsibility for the judgment of the borrower or the consequences of the borrower’s decisions. If the borrower fails to meet its obligations, the creditor is entirely justified in enforcing its contractual rights, in any legal manner available to it. If the creditor offers to discount amounts owed, or suspend payments on terms favorable to the borrower, any concession is supererogatory; an act of mercy, not duty, granted to a borrower that is understood to be irresponsible, inept, or incapable of meeting its obligations.

In principle, restructuring debt is a negotiation among all parties. But as contributors to this roundtable Leslie Elliott Armijo and Prateek Sood argue, in fact, the power imbalance is so profound that the borrower actually has little voice in shaping a plan to go forward.

There are other models of debt distress that operate differently, relocating the decision-making, at least in part, to the borrower, and introducing transparency and consistent standards for resolving unsustainable indebtedness definitively, rather than extending the debt in perpetuity through repeated restructuring. We can see models of this in various forms of bankruptcy law, where the debtor can seek protection through bankruptcy as a matter of right; the bankruptcy proceedings clearly identify the priority of the respective creditors and identify which of the debtor’s resources must be liquidated or transferred in the bankruptcy process, and which assets are necessary for employment and basic needs and thus are exempt. Indeed, as Eric LeCompte has noted elsewhere, there is already a framework for this: the United Nations General Assembly adopted a resolution endorsing the concept of sovereign bankruptcy; and the United Nations Conference on Trade Development articulated a framework for sovereign debt workouts, which would protect critical social needs, such as healthcare.¹¹

An additional issue is that some of these loans raise the concern of “odious debt,” whereby the indebtedness is not simply burdensome, but is arguably illegitimate on equitable grounds. Odious debt can be seen, for example, where the terms of the debt are usurious, or where the regime of the government that took on the debt is corrupt, diverting the proceeds of the loan, while the country’s population then bears the burden of repayment for many years to come.¹² The doctrine of odious debt implies that the creditor might arguably be barred from demanding repayment, or in some other way forego its contractual rights, where sovereign debts are “contracted and utilised, for purposes which, to the lenders' knowledge, are contrary to the needs and the interests of the nation.”¹³

The doctrine of odious debt seems compelling, at least on moral grounds, and within a legal framework, perhaps on equitable grounds as well: Where the bargaining power of the parties is grossly unequal; where the terms are so adverse as to bankrupt the state or undermine a country’s economic development; and where the creditor knows, or should know, that the funds are likely to be diverted or misused, there may be a claim that the creditor is complicit, or otherwise forfeits its full rights of enforcement.

In thinking about alternative frameworks for conceptualizing the obligations of debt, we might look at arguments of sufficiency: even if the principal has not been paid off, if the interest payments have allowed the creditor to recoup its original loan—perhaps even several times over—is that not sufficient? Or if the debtor has been burdened for many years, is there a claim that their debt should be cancelled every seven years (as the Hebrew Bible calls for),¹⁴ or every ten, or twenty? Or if debt effectively denies whole populations access to their fair share of the earth’s resources, might we invoke the Lockean proviso—that however much property is claimed, “enough and as good” must be left for others?

We may also consider counterbalancing the monetary debt that is owed to creditors in the North with the ecological debt that is owed to the South. In his papal encyclical Laudato Si’: On Care for Our Common Home, Pope Francis calls attention to this “ecological debt [that] exists, particularly between the global north and south, connected to commercial imbalances with effects on the environment, and the disproportionate use of natural resources by certain countries over long periods of time.”¹⁵ For Francis, relieving the burden of debt of the poorest nations is a “profoundly human gesture that can help people to develop, to have access to vaccines, health, education and jobs” and should be practiced from a greater awareness that we all owe “debt to nature itself, as well as the people and countries affected by human-induced ecological degradation and biodiversity loss.”¹⁶ Ultimately, Francis prompts us to think differently about the debtor-creditor relationships: who is the real debtor? How can we build a new network of international relations that advances the integral human development of all peoples? For a start, Francis suggests that we begin by “giving poorer and less developed nations an effective share in decision-making and facilitating access to the international market.”⁷ A spirit of global solidarity should open more conversation about how this should be brought into the discussion of financial debt and equity.

The essays in this collection consider three emerging issues in the dilemma of sovereign debt.

Eric LeCompte, the Executive Director of Jubilee USA Network, in “Addressing Debt Crises, Healthcare Access and the Pandemic,” looks at how the sovereign debt burden on the Global South has interfered with the ability of developing countries to respond effectively to the COVID-19 pandemic, compromising their investment in health care infrastructure. He looks at the debt relief that has been made available in the context of the pandemic and argues that it has not been nearly sufficient to address the economic and health crises.

Charles Chilufya, S.J. and Fernando Saldivar, S.J., with the Jesuit Justice and Ecology Network Africa (JENA) in Nairobi, Kenya, in “Uncharted Territory,” examine China’s rapidly growing role as a source of development capital for African countries and its implications for efforts to increase government transparency on the continent. Chilufya and Saldivar argue that Chinese lending practices in Africa are detrimental to the long-term democratic outlook of the debtor countries, and they explore the value commitments underlying China’s lending practices.

Leslie Elliott Armijo and Prateek Sood, political economists who have written extensively on sovereign debt, discuss the fundamental disparities in bargaining power in negotiating the post-default proceedings in “Voice at the Point of Sovereign Default.” They look at three case studies: the Latin American debt crisis of the 1980s, the Asian Financial Crisis of the late 1990s, and Argentina’s litigation with vulture funds in the early 2000s while working out a resolution with its creditors. In each of these cases, Armijo and Sood argue, the voices of the Global South actors were excluded or minimized at each stage of the negotiations.

What is clear from all of these essays is that whatever reforms have been undertaken, whatever relief has occasionally been granted, the role of sovereign debt, at least in regard to the Global South, continues to be deeply fraught with inequities, politicization, and arbitrariness. While state access to capital markets is critical to development, the capital that is ostensibly a means to achieve greater economic development is at the same time an arrangement that sends billions of dollars annually from the poorest countries in the world to the wealthiest ones; often worsens corruption; and compromises health, education, and social protections, all at a human cost that is simply incalculable.

—Joy Gordon and Dominic Chai, S.J.

Joy Gordon is the Ignacio Ellacuría, S.J. Professor of Social Ethics at Loyola University-Chicago, where she holds a joint appointment in the Philosophy Department and the School of Law. She works in the fields of human rights, international law, and ethical issues in international relations, with a focus on legal and ethical aspects of economic sanctions. Her works include Invisible War: The United States and the Iraq Sanctions (Harvard University Press, 2010). She has also published articles in Ethics and International Affairs, Georgetown Journal of International Law, Le Monde Diplomatique, Philosophy and Public Policy Quarterly, Yale Journal of International Affairs, Global Governance, Harvard International Law Journal, Philosophy and Social Criticism, Foreign Policy, Chicago Journal of International Law, and Yale Human Rights and Development Law Journal.

Dominic Chai, S.J. recently served as a co-coordinator of the Vatican COVID-19 Commission's Economy Taskforce at the Dicastery for Promoting Integral Human Development. He earned his Ph.D. from the London School of Economics and is currently pursuing theology studies at Boston College, where his research explores the integration of Catholic Social Thought into economic discussions related to promoting the common good. He also holds a research associate position at the Centre for Business Research at the University of Cambridge.