10 reasons why the debt crisis is not over

The new debt vulnerabilities.

Bodo Ellmers

inSh

This Eurodad report looks at the new debt picture in the sixth year of the global financial crisis. Debt vulnerabilities have changed, but overall they have not been substantially reduced. The good news is that the number of bank failures has dropped since the height of the financial crisis. However, the downside is that governments have paid a high price to stabilise the financial sector, and sovereign debt levels have surged. Attention must still be paid to the volatility and bursting speculative bubbles in middle-income countries, and ever riskier debt profiles in low-income countries. Unsustainable and illegitimate debt is still a risk to financial stability and, ultimately, to the economic and social fabric of our nations.

The report argues  that the debt crisis is far from over, and here are the ten reasons why: 

1. Economic imbalances continue to boost external debt

2. Capital is moving around the globe in an uncontrolled way

3. Private debt is on the rise

4. Sovereign debt is higher than ever in some places

5. Sovereign debt is riskier than ever in other places

6. The time bombs that are contingent liabilities could detonate at any time

7. Tax evasion and avoidance, and aid cuts, are undermining public income

8. Debt limit policies are subject to political manipulation

9. Responsible financing standards are rarely followed

 10. Effective debt workout mechanisms do not exist

All of these debt vulnerabilities are due to two simple facts. Since the crisis began:

•  Debt has not been cancelled or paid off, it has simply been shifted from one balance sheet to another, and primarily from the private purse to public or government coffers.

• The opportunity to use the financial crisis for fundamental reforms in national and international debt management and debt crises prevention and resolution has largely been wasted.

Recommendations:

The striking governance gaps are, in essence, all known to decision-makers. Six years into the crisis, Eurodad is calling on governments and international institutions to take the necessary steps to deal comprehensively with the debt crisis:

• Resolve ongoing debt crises and reduce legacy debt: Introduce an orderly insolvency regime for states. As stated in Eurodad’s debt workout principles, a new debt resolution mechanism for sovereign debtors must be independent from creditors; be transparent in decision-making; and take the developmental needs of indebted states and the human rights of its citizens into account when decisions are made.

•  Prevent future crises caused by unsustainable and illegitimate debt: Agree on a comprehensive and binding set of responsible financing standards and ensure compliance of all creditors and debtors, private and public. The Eurodad Responsible Finance Charter can provide valuable guidance and inspiration for decision-makers in this process