WASHINGTON, DC—The world is edging closer to a global debt crisis. The Iran war may have been the spark, but dry tinder has been piling up for quite a while. After a decade of debt accumulation, higher interest rates and growing refinancing needs have left the global economy increasingly exposed to shocks. And with ongoing conflicts driving up energy prices, renewed inflationary pressures are testing the limits of the existing debt architecture.
The outlook is especially worrying for developing countries, where public debt totaled $35 trillion in 2025, up 10.5% in the space of a year. According to the UN Development Programme, “the median developing country now spends about 9.5 percent of government revenue on interest payments, the highest share in 25 years.” There are 32 low-income countries in debt distress or at high risk of it. Yet restructurings with private creditors take an average of 2.5 years, twice the length of the process before the pandemic.
The core problem is not how much countries owe, but the cost and unavailability of fresh financing. Effective interest costs are rising faster than many countries’ capacity to service their debts with export earnings and fiscal revenues, and this gap could widen further. Even countries whose headline debt-to-GDP ratios have stabilized may face severe liquidity pressures if they are forced to roll over large amounts of debt at much higher interest rates.
This problem is not confined to developing countries. The OECD’s total interest bill has surpassed $2 trillion. The United States is absorbing enormous amounts of capital through rising public borrowing, AI hyperscalers are increasingly turning to bond markets themselves, and higher defense spending and large new fiscal commitments threaten to fuel further upward pressure on interest rates. When the world’s largest borrower can borrow on an almost limitless scale, countries with far smaller financing needs can find themselves paying the price.
This feature of the global debt architecture is unfair and unsustainable. Countries that borrowed cautiously can still be squeezed by decisions made elsewhere. Developing economies are facing an impossible choice of either paying more to refinance existing debt or cutting spending on health, education, infrastructure, and productive investment. The solution cannot be austerity alone. Debt sustainability ultimately depends on the productive capacity that generates tomorrow’s growth, revenues, and foreign-exchange reserves. Fiscal discipline matters, but so does protecting the public investment needed to make debt sustainable.
The good news is that the international community is not starting from scratch. Several reforms agreed last year in Sevilla at the 4th International Conference on Financing for Development have already achieved proof of concept. Debt-pause clauses are being standardized; innovative debt-for-development swaps have been tested; the International Monetary Fund and the World Bank have just approved changes to their debt-sustainability framework; collective-action clauses are becoming more widespread; and a new Borrowers’ Platform is giving debtor countries a stronger voice.
Markets are starting to take notice. Moody’s now considers the option to pause debt servicing as credit-positive, indicating that it will not treat activating a contract’s pause clause as a default. With this single change, one of the main reasons for policymakers’ hesitation to use such clauses has disappeared.
Nonetheless, our own expert group has identified a critical gap in implementing the Sevilla reforms: the necessary instruments exist, but they are not yet standard practice, as detailed in the Expert Group on Debt’s October 2026 implementation report. This could become a serious problem given current macroeconomic conditions. In an emergency, countries cannot wait years for new provisions to be embedded in contracts or legislation. They urgently need a process for temporarily suspending debt servicing, along the lines of the G20’s pandemic-era Debt Service Suspension Initiative.
This option should be made available for any countries facing acute pressures, with multilateral development banks (MDBs) encouraged to participate. By offering immediate liquidity relief, we can prevent today’s refinancing problem from becoming tomorrow’s solvency crisis. At the same time, concessional finance must be substantially scaled up and made more predictable. Given that additional sources of lending and refinancing are central to debt sustainability, MDBs should expand concessional resources, guarantees, and countercyclical financing. The wider community of public development banks (now united through Finance in Common) should be mobilized as part of the response.
Wherever and whenever it is feasible, countries should also diversify the currencies in which they borrow, strengthen domestic debt management and liquidity buffers, and develop financing strategies that better account for exchange-rate and refinancing risks.
Finally, debt-sustainability analyses must distinguish liquidity stress from insolvency and account for higher-for-longer interest rates, volatile export earnings, fiscal constraints, and the value of investments that strengthen resilience and productive capacity. The recently approved review of the IMF–World Bank Debt Sustainability Framework for Low-Income Countries (LIC-DSF) is a step in the right direction. It will push both institutions toward longer-term assessments, bring domestic debt into the analysis, and introduce liquidity indicators (gross financing needs and interest payments relative to revenue) to separate liquidity stress signals from insolvency.
But these changes will apply only from mid-2027, and they will not cover countries that typically have access to international capital markets. That means the institutions responsible for critical reforms have a choice. The G20, especially under the United Kingdom’s presidency next year, can turn its stated commitment to facilitate low- and middle-income countries’ debt coordination into practical reforms to the Common Framework for Debt Treatments. The IMF and World Bank can accelerate implementation of their revised LIC-DSF and extend it to market-access countries. Creditors and borrowers can turn debt swaps from one-off innovations into repeatable instruments. And borrowing countries can build the Borrowers’ Platform into a durable institution.
The architecture agreed in Sevilla was built for global shocks. The shocks have now arrived, but the implementation has not. Countries already carrying the heaviest financing burdens cannot afford to wait for reforms to catch up.
This commentary is signed by: Rémy Rioux, CEO of the Agence Française de Développement; Yan Wang, senior academic researcher at the Boston University Global Development Policy Center.
Copyright: Project Syndicate, 2026.
