Debt-Distressed Countries More Likely To Turn To Riskier Bailout Options – WTW

High government expenditures during the pandemic, coupled with global inflation and increased interest rates in 2023, have contributed to an escalating debt crisis in emerging markets, according to the latest political index report by WTW.

The report details how political challenges may make it increasingly difficult for multilateral institutions, including the International Monetary Fund and the World Bank, to play their traditional crisis management roles, which WTW says could heighten the political and economic risks associated with debt crises.

Other findings suggest that cuts in government spending are likely to trigger protests linked to austerity, which are already on the rise, particularly in low-income countries. The report also warns that countries with a high ratio of public interest payments to public revenue may be most vulnerable to sovereign debt crises in the near to medium term.

WTW highlights that partly because of intensified geopolitical competition, the politics of sovereign debt restructuring following debt crises have become increasingly complicated with countries more likely to turn to non-traditional bailout options as a result. Climate change too could become an increasingly important driver of crises of debt sustainability.

Evan Freely, global head of financial solutions at WTW, said: “A conveyor belt of economic shocks has hit the world’s most vulnerable countries hard. Emerging market governments may look for less transparent short-term financing, accepting higher interest rates in return for fewer conditions, however this increases both humanitarian and business risks. This report indicates that geopolitics is complicating an already difficult situation, and these trends should be carefully monitored from a risk management perspective.”