Despite the huge losses of developing countries as a result of the debt crisis, still this matter is not receiving the attention it deserves, compared to previous crises that undermined development opportunities, as happened over previous decades, such as the African and Latin debt crises in the 70s and 80s, and then the emerging Asian market crisis in the 90s of the last century.
After the end of World War II, the victorious countries placed a maximum limit on Germany after they lost the war and this limit was for servicing its foreign debts, as the amount that not exceed 5 percent of Germany’s total export revenues, so as not to hinder rebuilding and recovering from the effects of the war. Where today, lower-income countries pay much higher percentages, which may reach 23 percent of their export revenues.
The leaders of the victorious countries, which were more aware of the causes of the war and its ravages, paid attention and learned from the lesson of the “Versailles Agreement”, which imposed heavy burdens on defeated Germany in World War I, causing economic disasters in terms of high prices and unemployment and political repercussions that escalated with the Nazi, which pushed Germany into the war.
Otherwise, if the situation remains as it is, there will be a frightening connection between the peace agreement, debts, and the outbreak of wars.
In our world today, there are those in positions of power who have the ability to harm others, without paying attention to the repercussions of bad policies on developing countries, except when immigrants fleeing the conditions of their countries come to them. Despite the rising voices in countries receiving immigrants, out of fear for their established systems of social welfare, and out of concern for their social and cultural customs, the contribution of migrant minds and labor to the growth and progress of these countries has become clear.
If some want to place the entire burden of the debt crisis on external causes; from a pandemic, wars, geopolitical conflicts, and other external shocks, this will be in high percentage wrong.
The responsibility of external shocks for the debt crisis does exist, but it’s not alone the responsible for the crisis. For example, many developing countries borrowed to deal with the pandemic, but these shocks were also a scandal, as developing countries committed excessive borrowing, opportunistically, without hedging against low interest rates, which tempted more borrowing.
The accumulation of public debt, including foreign loans, makes debtor countries vulnerable to the risks of interest rate fluctuations and sudden changes in currency exchange rates... We find financial flows to developing countries and many emerging markets fluctuating and declining, and a rapid ebb and flow of hot and floating money.
This will sure confuse the monetary policies and increases doubts about the trends of interest and exchange rates.
These changes require that economic management take the necessary measures to protect against the risks of short-term shocks.
These conditions also contributed to accelerating debt crises that would have inevitably occurred, as the phenomenon of “lower interest rates for a longer period” marked the end of the era of cheap borrowing, then money poured in with unprecedented monetary easing to deal with the pandemic and fears of recession, and then inflation broke out, bringing with it first-time high prices in 4 decades.
In the end, it was necessary for the central banks, led by the Federal Bank, to raise interest rates several times in a row, without paying attention to their negative effects on the economies of developing countries, until financial flows to them became negative, and direct foreign investment declined.
Conclusion
Today we are living in a phenomenon of “higher interest rates for a longer period,” which means that the cost of borrowing will no longer be as cheap as it was before external shocks with its crisis-accelerating effects. Despite this, there are a number of countries that are hoping to enter debt markets again, and they are waiting for opportunities.
Some people think that there is a cure for debt. If there is a need for development, they borrow, if they want to confront climate change, they borrow, and if they try to pay off old debt, they borrow.
With global interest rates heading for a decline, after inflation rates stabilize, an alternative approach should be taken to finance growth and development.
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