Expert Analysis: Sovereign debt - where is the biggest problem?

Sovereign debt problems are once again hot policy issues – but it is the problems of neither the poorest countries nor large emerging markets which are dominating the headlines.

It is rather the debt of the developed world: in Europe, the UK, Ireland, Spain and above all Greece; whispers extend even to the US. These countries face difficult political and economic choices relating to higher taxation and lower spending in order to reduce the level of indebtedness.

But there is another group where debt problems have been headline news for far longer and which has not attracted the attention of global policy makers. The emerging debt problems of small, mainly middle income, vulnerable economies demand a response from the Commonwealth and the international community. Preliminary analysis undertaken by the Commonwealth Secretariat[1] suggests that 37 per cent of Commonwealth small vulnerable economies (SVEs) are experiencing significant debt difficulties and that for another 20 per cent debt problems may well loom on the horizon.

Let’s put the issue into context. It is widely acknowledged that the debt carrying capacity of these economies is below that of advanced countries, so public debt to gross domestic product (GDP) ratios in excess of 60 per cent (the EU’s benchmark) should be raising alarm bells. The current UK public debt to GDP is 64.9 per cent. By comparison, 8 Commonwealth SVEs had total public debt ratios to gross national income (GNI) in excess of 90 per cent. Two more have ratios in excess of 60 per cent and a further three are close to the EU 60 per cent level[2].

Many SVEs also have worryingly high debt service indicators. In terms of international benchmarks total debt service should not exceed 15 per cent of government revenue. Interest payments as a percentage of total government revenue and grants in 2009 were projected to be 45 per cent in Jamaica; 32 per cent in Seychelles; 27 per cent in St Kitts and Nevis; 13 per cent in Belize; and 11 per cent in Grenada.

These countries are in a precarious situation and have been neglected by the international community. The global financial crisis will only have made this worse. In response, the Secretariat is about to start work with a panel of leading experts to develop policy options for discussion by Commonwealth ministers and the international community to address this issue.

Samantha Attridge is the Commonwealth Secretariat’s economic adviser on global issues.

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