How Emerging and Developing Countries Can Cope with Unconventional Lending Practices and Overcome the Ongoing Debt Crisis

The growing number of bonds issued and loans contracted by emerging and developing countries in the 2000s and 2010s was often considered sustainable. However, the COVID-19 pandemic and the resulting economic depression dramatically increased borrowing needs. Subsequently, the recovery of 2021 fueled inflation and obliged central banks in the United States and Europe to tighten monetary policy, thereby making refinancing highly costly. Together, these factors rendered a larger share of emerging and developing economies’ debt unsustainable. By 2023, total sovereign debt in default had reached $500 billion, an all-time high. This chapter argues that traditional options for restructuring sovereign debt are outdated. This is because current tensions between China and the United States have not only exacerbated creditor coordination problems but also revived debtor moral hazard. As a result, the chapter outlines several guidelines to assist sovereign defaulters in restructuring their obligations. First, defaulters should make every effort to gather all creditors and persuade them to accept a single haircut, regardless of their claims. Second, if such efforts prove unsuccessful, they should prioritize creditors capable of acting as lenders of last resort and those creditor states with the most powerful legal systems and financial networks – that is, those most likely to retaliate against the defaulter. A third option may involve more radical approaches. Defaulters should be aware of the resurgence of the odious debt doctrine and its potential for a broader scope of application. In cases involving hidden debt, opacity becomes a problem when the democratic process is bypassed. Moreover, legal challenges may undermine the enforceability of sovereign debt contracts if the creditor deliberately indebts the debtor state to create economic dependence, ultimately jeopardizing its sovereignty. Finally, when creditors seize natural resources or land, the question arises of how sovereignty is defined in international public law and what legal consequences this entails for debt repudiation.