Debt tsunami threatens Global South

  The next global debt crisis may not arrive with the drama of Lehman Brothers. No spectacular market collapse. No single bank failure. Instead, warning signs could appear quietly. A sovereign bond rolled over at a punishing rate. A development project postponed. A health budget squeezed. Or a cash-strapped government forced to spend more on debt servicing than on health and education. IMF Managing Director Kristalina Georgieva has sounded a similar alarm. As advanced-economy bond yields rise, they lift yield curves worldwide, she said after the G20 finance ministers' meeting earlier this month. For some emerging economies, financing costs can more than erase hard-won reductions in risk premiums. Countries that have improved their fiscal credibility can, therefore, find themselves paying more simply because the global price of capital has changed. The story begins with the post-pandemic monetary tightening. Between March 2022 and July 2023, the US Federal Reserve hiked its rate from near-zero to 5.25%-5.50% in one of the fastest tightening cycles in decades. However, easing that followed hasn't produced a corresponding decline in long-term borrowing costs. Short-term rates are heavily influenced by central banks, while long-term yields also reflect inflation projections, government borrowing, fiscal sustainability, geopolitical risks, and bond supply and demand. The IMF's April 2026 Fiscal Monitor paints the broader picture. Global public debt ballooned to nearly 94% of GDP in 2025. And it is projected to soar past 100% by 2029. Much of the increase is driven by major economies facing rising demands for social spending, defence and strategic investment, while interest burdens are also increasing. This doesn't matter to Washington, London, Tokyo or Paris alone. Government bonds issued by advanced economies provide the benchmark against which much of the developing world borrows. When those yields rise, financing costs elsewhere follow suit. The World Bank's International Debt Report shows how sharply borrowing costs have increased. Low- and middle-income countries paid a record $415.4 billion in interest on external debt in 2024, up 2.2% from 2023 and more than double the amount a decade earlier. In low-income countries, interest payments made up more than half of total external debt service. Between 2022 and 2024, low- and middle-income countries paid about $741 billion more in principal and interest on external debt than they received in new financing, according to the World Bank. This constitutes the largest such net outflow in at least five decades. The consequences show up gradually in government budgets. A road is not built. A power project is postponed. A vaccination programme is trimmed. Or a hospital delays procurement. Lower investment means weaker productivity and slower growth, making debt harder to service and potentially pushing borrowing costs higher. Much sovereign and corporate borrowing is denominated in dollars. Exchange rates, therefore, compound the problem for developing economies. When the dollar appreciates or local currencies depreciate, the domestic-currency cost of servicing debt rises even if the principal amount borrowed stays unchanged. Higher global rates can encourage capital to move towards advanced-economy assets. And this adds further strain on the currencies and forex reserves of developing economies. Their central banks may have to maintain tighter monetary conditions, resulting in higher external debt costs, weaker currencies, and slower growth. Emerging markets, according to the IMF, are particularly vulnerable to such spillovers. The global lender's latest fiscal assessment points to structural changes in sovereign debt markets, including the growing role of leveraged non-bank financial institutions and a reduced safety premium on US Treasuries. If and when central banks will cut rates no longer the question. What matters is whether long-term borrowing costs will fall enough for heavily indebted economies to regain fiscal space. Launched in 2020, the G20's Common Framework was designed to coordinate debt treatment among official bilateral and private creditors. But restructuring cases have often taken years, exposing the complexity of today's creditor landscape. Governments may simultaneously be indebted to multilateral institutions, traditional Paris Club creditors, China and other bilateral lenders, including commercial banks and bondholders. The longer restructuring takes, the greater the economic damage can become. The IMF MD has urged decisive action by countries with unsustainable debt and improvements to the restructuring process. Lower policy rates may not resolve the problem because several structural forces are driving up long-term yields. Governments are borrowing heavily. Defence spending is rising. The energy transition requires huge capital investment. Supply chains are being reorganised. And AI is propelling a new wave of infrastructure and data-centre investment. These activities compete for long-term capital. Investors are also demanding greater compensation for fiscal and inflation risks that were easier to ignore during the era of ultra-low interest rates. A central bank can control its overnight policy rate, but it cannot dictate the yield investors demand to lend to governments for 10, 20 or 30 years. The most dangerous feature of the current debt environment is its gradual nature. A country may not default when interest rates rise. It may refinance debt, scale down reserves, cut spending, seek multilateral assistance or postpone investment. The system continues functioning for a while. According to the World Bank, in 2024 the average interest rate paid by developing economies on newly acquired public debt reached a 24-year high, while the average rate paid to private creditors reached a 17-year high. Therefore, the adjustment takes place through cuts in budgetary allocations for health, education, infrastructure and other social spending. So, what should the Global South economies do? They can strengthen domestic revenue mobilisation, lengthen debt maturities, deepen local-currency bond markets, improve debt management and pursue credible fiscal policies. Domestic reform, however, cannot offset changes in the global price of capital. That is the crux of the IMF MD's warning. THE WRITER IS AN INDEPENDENT JOURNALIST WITH A SPECIAL INTEREST IN GEO-ECONOMICS