Developing countries are drowning in debt. A staggering $31 trillion is owed by nations across Africa, Asia, and Latin America—enough to theoretically solve world hunger, yet in reality, more than 3 billion people live in countries that prioritize debt repayment over essential services like healthcare and education. This isn’t new, but it’s worsening as interest rates rise, disasters multiply, and private lenders gain dominance.
The cycle is simple: take out new loans to cover old ones, a tactic familiar to anyone with credit card or student debt. When crises hit—hurricanes, pandemics, economic shocks—the situation spirals out of control. The result? Defunded schools, stagnating economies, and plummeting credit ratings, making future borrowing even more expensive. As Penelope Hawkins of the United Nations observes, “You can check out any time you want, but you can never leave.”
The Role of Wall Street
The problem isn’t debt itself; it’s the terms. While developed nations borrow in their own currencies and can often refinance cheaply, poorer countries face exorbitant interest rates. Private creditors, particularly hedge funds and insurance companies, now hold 60% of low- and middle-income countries’ external debt, a trend rising since 2010. This shift began after the Paris Club—an informal group of Western creditor nations—scaled back lending in the early 2000s, leaving a vacuum filled by profit-driven private lenders.
The legal framework exacerbates the issue. Sovereign debt contracts are often litigated in New York and London, where Wall Street firms wield significant influence. This allows creditors to demand full repayment, even in crises, while borrowers struggle to restructure debt effectively. The case of Argentina, where Elliott Management (a notorious vulture fund) seized an Argentine naval ship to recoup loans, illustrates this ruthlessness. They ultimately secured a 392% return on their investment.
The Vicious Cycle in Practice
The consequences are brutal. Zambia, for example, defaulted in 2020 due to unsustainable borrowing, corruption, and external factors like droughts and volatile commodity prices. As a result, 3.4 billion people now live in countries spending more on debt servicing than on healthcare or education, a gap that has widened by 10% in the last year alone.
The COVID-19 pandemic, rising interest rates, and climate disasters have worsened the situation. Developing nations spent $741 billion more on loan repayments than they received in new financing between 2022 and 2024, yet their debt continues to grow.
The Future of Debt Relief
While there’s no easy fix, proposed laws in New York and London could curb predatory lending practices. Simplifying debt restructuring processes would also help countries escape the cycle faster. The reality is that many nations aren’t defaulting outright; they’re sacrificing development to meet their obligations.
The current system isn’t just a financial issue—it’s a humanitarian one, as Joel Curtain of Partners in Health points out: “This crisis is embodied in sickness, ill health, and death.” Unless systemic changes occur, the global debt trap will continue to stifle progress in the world’s most vulnerable nations.
Ultimately, the world’s financial system continues to prioritize profit over people, ensuring that the cycle of debt and dependency persists.
