A group of children play in a flooded area in Cochabamba, Bolivia.picture Alliance (via Getty Images)
The truism is that countries never pay their debts, they renew them. For those who do not have this opportunity, there is a default, the impact of which on the lives of citizens is only just beginning to be understood. A new study by the nonprofit organization Open Societies Foundation (OSF) released on Tuesday found that defaulting on sovereign debt in developing countries impacts child mortality, lowers living standards, increases poverty and worsens the health of citizens.
For governments to be able to renew their debt and avoid very large payments in a single installment, their public finances must be healthy and manageable. This creates the confidence investors need to buy new debt so that governments can pay off the debt as it matures. This was much easier for rich economies, so historically there are numerous examples of developing countries defaulting on their borrowing obligations. Many of these are in Latin America.
As interest rates have risen across much of the world in response to global inflation, the number of defaulting countries is at its highest since the early 2000s, according to an OSF analysis based on data collected by the World Bank. Today there is a record number of countries at risk of default.
In this climate, an event led by the governments of France and Germany will take place this Thursday and Friday, aimed at concluding a global “new financial pact” that will allow the “global south”, that is, the poor countries and the developing countries We have friendlier financing alternatives to fight climate change. The participants also include Brazilian President Luiz Inácio Lula da Silva and his Colombian counterpart Gustavo Petro. On Tuesday, Mexican President Andrés Manuel López Obrador announced that he would sign a letter to his US counterpart Joe Biden asking for help to ease the financial crisis Argentina is going through.
Argentina has defaulted on its debt payments nine times since 2001, while Ecuador defaulted in 2020 during the pandemic. The region also has the cases of Mexico in the 1980s and Uruguay in 2003, both of which were included in the OSF study. The impact of a sovereign debt default “is felt most by vulnerable populations such as children, the elderly and the poor,” authors Clemens Graf van Luckner and Juan Farah-Yacoub, both research economists, wrote, “and moreover appears to be felt to increase over time when the breach is not remedied.”
When a country defaults on its debts, it loses access to international capital markets, preventing private domestic companies from accessing resources at an efficient interest rate and making trading with counterparties abroad more expensive and difficult. “The longer this goes on, the higher the cost will be, especially compared to an alternative scenario where all of this is affordable. “The channels through which national bankruptcies and the associated financial and economic crises harm the population are manifold,” says the report.
According to experts, when a country’s sovereign debt crisis is resolved in less than three years, child mortality is 2.2% higher than expected ten years after the default. On the other hand, if the default lasts longer than three years, the difference increases to 11.4% more. In the countries analyzed in the report, which includes countries not only in Latin America but also in Africa, life expectancy ten years after the default falls by more than a year compared to what it would have been if the default had not occurred were.
“In addition, the deficit in the growth rate of real output per capita increases by 2 percentage points in the first year of default compared to what would have happened without default,” the PAHO statement said. “From then on, it’s growing at an average of 1.5 percentage points per year. Within a decade, the gap grows to about 14.5 percentage points. In other words, with each year that a country remains insolvent and locked out of international markets, the decline in economic output and hence income generation worsens.
As a country defaults, improvements in living standards continue to be suppressed, and those costs add up over time, explain Graf van Luckner and Farah-Yacoub. For example, it took just a year to recover from Uruguay’s 2003 default, and the country immediately experienced a return to growth. In the years that followed, Uruguay’s upswing benefited the country’s poorest in particular. In contrast, it took more than five years for neighboring Argentina’s 2001 default to be resolved, and the country’s poverty rate rose from 38% in 2001 to 53% in 2002.
“Mexico’s debt crisis of the 1980s demonstrated that while child mortality continued to decline in some sectors of society during the crisis, parental income suddenly became a critical factor in a newborn’s chances of survival,” the report says. “This shows how. The poorest bear the brunt of the consequences of non-compliance.”
In an electronic correspondence with EL PAÍS, one of the report’s authors, Farah-Yacoub, emphasized: “Our findings show the long-term economic scars and the human costs; They serve as a reminder to continuously strive to control risks and, if they arise, to take immediate measures to contain costs. You can tie this to the case of Latin America if you look at the continent’s history of debt crises.
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