Debt Relief in the Global South Would Benefit Americans

Amidst a succession of financial shocks, the Middle East war being only the most recent, developing countries’ debt levels are alarmingly high and continuing to rise. These burdens make it even more difficult for governments in the Global South to meet the basic needs of their populations. And because the world is inter-connected through international trade and financial markets, these developing country debts boomerang back to harm ordinary people in the United States and other advanced economies as well.

To effectively address this growing crisis, we need to recognize that the debt landscape is very different today than it was in the late 1990s/early 2000s, when global leaders agreed on relief initiatives worth more than $130 billion. Back then, private creditors held only about five percent of developing country debt. The rest was in the hands of public creditors, including the United States, UK, Germany and other Group of 7 rich country governments, as well as multilateral financial institutions such as the International Monetary Fund and the World Bank, which the G7 largely control.

Today, more than 60 percent of developing country debt is owed to private creditors who typically have the power to sue for full payment even when collective talks or international community initiatives for debt relief are ongoing. The mere threat of litigation gives these private creditors disproportionate leverage that puts debtors at a disadvantage and erodes debt relief gains. During Ethiopia’s prolonged struggle to access debt reductions under the G20 Common Framework, for example, private bondholders threatened to sue rather than make an effort similar to that of public creditors.

What can be done? One promising approach involves working the levers of power in the jurisdictions that govern private debt contracts. More than 90 percent are issued in New York and the UK. And over the past year, a bill to crack down on predatory private creditors gained real traction in the New York legislature. The “Champerty Fix Act” would prevent private creditors with debt contracts in that state from purchasing heavily discounted debt and then litigating to collect in full, instead of constructively engaging in debt negotiations.  The bill would also significantly cut the high interest rates that debt crisis countries pay on claims under litigation.

With support from a coalition of religious, business, union, anti-poverty, environmental, development, and diaspora organizations, the bill passed the New York Senate and had enough support to pass in the Assembly, but that chamber’s leader chose not to bring it up for a vote by the time the session ended in early June. Supporters continue to demand that the Assembly be re-opened for a vote on the matter before the end of the year.

This legislation would be a huge win for the billions of people in countries where high debt payments divert essential financing for poverty reduction, social services, and development progress. It would also benefit workers, savers, consumers, and taxpayers in advanced economies – including the United States. Private creditors’ current power to disrupt sovereign debt resolution has negative ripple effects on our own people, especially the most vulnerable.

When debt crises affect U.S. trade partners, jobs and wages that depend on import- and export-dependent companies in the United States inevitably suffer. And when inflation goes up due to supply chain disruptions in countries undergoing debt crises, consumers quickly feel it in the prices of their groceries and other everyday goods.

Pensions and other savings vehicles in the United States have exposure to indebted developing economies either directly – when they invest in instruments they issue – or indirectly — when they invest in U.S. companies that have trade or investment in such countries. Reducing the time it takes a country to go from a debt crisis to a lasting restructuring – which currently averages 10 years – would significantly improve returns for our pensions and savers.

Taxpayers also have a stake in ensuring that taxpayer-funded debt relief does not bail out private creditors unwilling to negotiate fairly. In current restructuring deals, private creditors typically get repayments that are 20 percentage points higher than those received by public lenders.

Debt relief for the poorest has strong religious foundations that cut across multiple faith traditions and has been a landmark bipartisan pillar of U.S. policy under every Administration since the late 1990s.

Last year, Treasury Secretary Scott Bessent and his counterparts in all G20 countries adopted a declaration on debt sustainability. As the United States took over this year’s Presidency of the G20, he reaffirmed this direction by making the improvement of debt restructurings and debt transparency a priority. Building checks on private creditors in jurisdictions whose courts they use as leverage would go a long way towards supporting these goals by facilitating successful debt renegotiations.

Lifting the burden of unsustainable debts is the morally right thing to do — and it is in our interest.