S&P expects rising sovereign debt defaults next decade

S&P Global Ratings anticipates an increase in foreign-currency debt defaults among sovereign issuers over the next decade due to rising debt levels and higher borrowing costs. On average, sovereigns reviewed spent nearly 20 per cent of their general government revenues on interest payments in the year before defaulting.

This spike in borrowing costs stems from factors like inflation, currency devaluation, terms-of-trade shocks, and a significant portion of government debt being denominated in foreign currency.

“Most sovereign foreign currency defaults over 2000-2023 resulted from weak institutional, fiscal, and debt composition factors” noted S&P Global credit analyst Giulia Filocca. “A single measure that consistently and reliably predicts sovereign defaults does not exist.”

Sovereigns with high net external liabilities—where public and private debts owed to non-residents exceed domestic assets—are more likely to default, while net external creditors seldom face this risk.

Many at-risk sovereigns, including Cyprus, Grenada, and Greece, often have gross external financing needs that exceed their current account receipts and foreign exchange (FX) reserves, according to S&P.

Attribution: Bloomberg

Subediting: M. S. Salama