Public debt stocks and debt-to-GDP ratios have been mounting over the past years across advanced as well as emerging market economies and low-income countries (Ems and LICs) and experienced a sharp increase in the wake of the COVID crisis. As of today, debt-to-GDP ratios remain elevated and are still expected to grow. Most notably, a distinguishing feature of the current situation compared to public debt surges in the past is the increase of domestic debt – both defined by governing law and by creditors’ residence – relative to GDP, including in Ems and LICs. This is reflected by the growing share of domestic debt restructurings (DDRs) in recent debt restructuring cases.
Looking forward, the risk that countries in distress will have to restructure domestic debt, with potentially grave implications for financial stability, is bound to rise further. Ems and LICs are particularly prone to debt vulnerabilities; over 50% of DSSI-eligible countries are currently in debt distress or at high risk of distress. In this context, there is a pressing need to strengthen the effectiveness of debt crisis resolution processes and encourage pre-emptive action. Compared to debt restructurings following a default, pre-emptive debt restructurings are generally faster and the economic consequences in terms of decline in growth and investment are less severe. Moreover, beyond addressing legacy debt, unlocking new financing flows is vital to address Ems extensive financing needs for social investment, infrastructure and climate change mitigation and adaptation among others.