SESRIC




Assessment of Sustainability and Insolvency of the External Debt
Date : 16 January 2012

Sovereign debts, their sustainability and debt crises have been one of the foremost issues for the international policy makers over the past decades. At present, the global credit system is again going through a state of instability. The current instability, however, also stems from the recent “sub-prime crisis” in the United States of America (USA) and financial meltdown of several European economies. The current trends of the sovereign debt of several European countries have led to the possibility of the financial institutions to collapse. The European sovereign debt crisis started in 2008, with the collapse of Iceland’s banking system, and it further spread to Greece, Ireland and Portugal during 2009. Similarly the public sovereign debt of the USA has also crossed the critical levels and it may lead to another global financial crisis. These developments will severely impact the OIC member states already in debt stress. Therefore, it is important that policies are being devised now in order to minimize the negative consequences of such an international crisis.

Furthermore, questions have been raised at the academic level about the sustainability of US public debt and a possible crash of the US dollar. In this background, it is pertinent that a review of the current state of sovereign debt of the OIC is being undertaken and to identify those member states which are going through external debt stress and also present some measures to spot those member states that are considered as vulnerable to an external debt crisis in future.

In order to achieve minimum standards of living, address the issues of poverty alleviation, and promote economic growth by creating employment and building infrastructure, developing countries have been using external finance for resource mobilization. However, developing countries have also gone through repeated episodes of unsustainable increase in their external indebtedness and excessive burdens of debt-service that have impeded the economic growth and caused severe financial crises. It is in this context that the Monterrey Consensus of the International Conference on Financing for Development (United Nations, 2002) has highlighted the significance of sustainable debt levels in the process of the mobilization of resources for development.

Online Electronic Version

Assessment of Sustainability and Insolvency of the External Debt (English)