S&P Predicts Rise in Sovereign Foreign Debt Defaults Over Next Decade

 

S&P Global Ratings has forecast an increase in sovereign foreign-currency debt defaults over the next decade, driven by rising debt levels and increased borrowing costs on foreign currency obligations. The ratings agency noted that many governments face escalating costs associated with servicing foreign debts, with some spending nearly 20% of general government revenues on interest payments before defaulting.

Factors contributing to this pressure include rising inflation, currency devaluation, and shocks to trade terms, all exacerbating the burden of hard currency debt. Additionally, sovereigns with a significant portion of government debt in foreign currency are more vulnerable to these pressures, according to S&P.

Giulia Filocca, an S&P Global credit analyst, highlighted in a report that no single measure consistently predicts sovereign defaults, noting that weak institutional, fiscal, and debt composition factors have driven most defaults from 2000 to 2023. Sovereigns with high net external liability positions, where the public and private sector debts owed to non-residents surpass the assets invested by residents abroad, are more likely to default.

Countries like Cyprus, Grenada, and Greece have faced foreign currency defaults due to large gross external financing needs exceeding their current account receipts and foreign exchange reserves. Sovereigns in similar positions are expected to be at higher risk moving forward.