S&P Global Ratings has forecasted a rise in defaults on foreign-currency debt among sovereign issuers in the coming decade, attributing this trend to significantly elevated debt levels and rising borrowing costs associated with hard currency obligations.
The ratings agency reported that, on average, governments under review allocated nearly 20% of their general revenues to interest payments in the year preceding their defaults on foreign-currency debt.
This high cost of borrowing stems from various factors, including escalating inflation, currency devaluation, shocks to trade terms, and a substantial portion of government debt denominated in foreign currencies.
“Most sovereign foreign currency defaults over 2000-2023 resulted from weak institutional, fiscal, and debt composition factors,” noted S&P Global credit analyst Giulia Filocca in a detailed report.
A single measure that consistently and reliably predicts sovereign defaults does not exist.
S&P’s analysis indicates that sovereigns with increasing net external liabilities—where the total public and private sector debts owed to foreign entities surpass the assets that residents have invested abroad—are more vulnerable to defaults.
In contrast, net external creditors are less likely to encounter similar risks.
The report highlights that many countries facing potential foreign currency defaults, including Cyprus, Grenada, and Greece, frequently experience gross external financing needs that far exceed their current account receipts and foreign exchange reserves.
This imbalance exacerbates their vulnerability and underlines the challenges they face in meeting their debt obligations.
As global financial conditions evolve, S&P’s findings serve as a critical reminder of the pressures faced by sovereigns in managing foreign debt and the complex interplay of economic factors that can lead to defaults.
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