S&P Global Predicts Rise in State Bankruptcies Due to Foreign Currency Debts Over the Next Decade

S&P Global Ratings is forecasting an increase in state bankruptcies tied to foreign currency debts over the coming decade. The agency cites significantly higher debt levels and the rising costs of borrowing for countries with obligations in hard currencies as key drivers of this trend.

The countries reviewed by the rating agency spent, on average, close to 20% of their total government revenue on interest payments in the year leading up to default. This high borrowing cost was attributed to factors like rising inflation, currency depreciation, disruptions in terms of trade, and the fact that a substantial portion of their public debt was denominated in foreign currencies.

S&P Global analyst Giulia Filocca, in a statement reported by Bloomberg, explained that "Most foreign currency sovereign defaults during the period 2000-2023 were due to weak institutional, fiscal and debt composition factors." Filocca also noted that “there is no single measure that consistently and reliably predicts government bankruptcies.”

According to the agency, countries with a high and increasing net external liability—where the total external debts of both public and private sectors exceed foreign investment in domestic assets—are more prone to bankruptcy. In contrast, nations that are net external creditors seldom face default risks.

By fLEXI tEAM