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Developing Nations in Danger of Greek-style Debt Crises

Developing Nations in Danger of Greek-Style Debt Crises
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Anti-austerity protests turned violent this week as Greece battles a debt crisis that has crippled the economy.

Athens may be in the headlines, but campaigners say the potential is building for full-blown debt crises in many parts of the developing world.

“There’s a huge boom in lending happening, especially in some of the most impoverished countries in the world," said Tim Jones of the Jubilee Debt Campaign, a movement advocating debt cancellation and alleviation of poverty. "So we’re worried that unless action is taken, they could end up in new debt crises again.”

FILE - A vendor displays wares for sale in the central market in Gorongosa, Mozambique, a country with a booming economy yet growing inequality and poverty.
FILE - A vendor displays wares for sale in the central market in Gorongosa, Mozambique, a country with a booming economy yet growing inequality and poverty.

Among the 20 countries described as most vulnerable to a debt crisis is Mozambique.

“Its economy has been booming massively," Jones said. "It’s had huge amounts of lending to the country, but actually poverty is increasing at the same time, and inequality is increasing. So the loans are not necessarily helping in tackling the problems of the country.”

The Jubilee Debt Campaign said the total amount owed by debtor countries is due to hit $14.7 trillion this year, a 30 percent rise in four years. The group said 20 nations are already mired in debt crises, with many more vulnerable to economic turbulence.

It’s all tied to the recent financial crisis, said Judith Tyson of the Overseas Development Institute, speaking via Skype from Greece.

“We’ve really seen a surge of debt being issued because of the search for yield, which is where investors in primarily Europe and the United States are looking for new investments because of the very low interest rates in our economies," she said. "And one of the places they’ve invested large amounts of money is in sovereign debt in developing countries.”

Longtime Problem

Other countries, particularly in Latin America, have been burdened with high debts for decades, Jones said.

“If we take Jamaica, their debt crisis first began in the 1970s," he said. "And actually since the 1990s they’ve had huge government surpluses, but the debt has remained because the interest is just so high, and the economy has been depressed in the attempt to pay these debts. And it just shows you can’t get out of a debt crisis by making cuts.”

That is the argument put forward by the Greek government. But Europe, led by Germany, insists spending cuts and reforms are the only way to revive the economy.

For indebted developing countries there are additional risks.

“The debts are all owed in foreign currencies, like the dollar or the euro," Jones said. "And so when a country has a currency devaluation, then the debt payments shoot up.”

As the debts grow, so do the risks. “It’s certainly very high-risk investments of the sort where we could see significant losses in the future,” Tyson said.

Campaigners are calling for much tighter regulation of lending and debt write-offs for those countries already in crisis.