By Oliver Pahnecke and Juan Pablo Bohoslavsky
The global debt burden has reached unprecedented levels. Over 20 years, global public debt has quadrupled, while global Gross Domestic Product (GDP) only tripled. In January 2024, six developing countries had country risk premiums above 20 percent; 39 percent of developing countries make net interest rate payments exceeding 10 percent of total public revenue. Only 14.8 percent of these countries have an investment-grade credit rating. Global debt has been unsustainable for decades but what if there was one mechanism in the International Financial Architecture that is largely responsible for this lack of debt sustainability? What if this mechanism could be corrected to make – to a great extent – the international financial architecture more resilient and lending more affordable? For 30 years lending uses weighted risk, adding risk premiums to the interest rates of loans. In this system, the risk premium can replace collateral and protects the lender’s principal. If the risk premium were legally treated as a collateral sui generis, loans could become significantly cheaper because risk premiums would have to be returned after full repayment, or adjusted over time, in accordance with the real default risk. This article analyses the cost of today’s risk premium system for States and their citizens’ human rights.