What Has Been the Impact of COVID-19 on Debt ? Turning a Wave into a Tsunami

This paper presents a comprehensive analysis of the impact of COVID-19 on debt, puts recent debtdevelopments and prospects in historical context, and analyzes new policy challenges associated with debtresolution. The paper reports three main results. First, even before the pandemic, a rapid buildup of debt inemerging market and developing economies—dubbed the “fourth wave” of debt—had been underway. Because of the sharpincrease in debt during the pandemic-induced global recession of 2020, the fourth wave of debt has turned into atsunami and become even more dangerous. Second, five years after past global recessions, global government debtcontinued to increase. In light of this historical record, and given large financing gaps and significant investmentneeds in many countries, debt levels will likely continue to rise in the near future. Third, debt resolution has becomemore complicated because of a highly fragmented creditor base, a lack of transparency in debt reporting, and a legacystock of government debt without collective action clauses. National policy makers and the global community need to actrapidly and forcefully ensure that the fourth wave does not end with a string of debt crises in emerging market anddeveloping economies as earlier debt waves did.