The domino effect of countries’ default on the global economy

The global economic crisis triggered by the COVID-19 pandemic has pushed many countries to the brink of bankruptcy, threatening to unleash a wave of social and political turmoil that could have dire consequences for millions of people.

According to the United Nations, more than 50 poor countries are in danger of defaulting on their debts, which would be catastrophic for their development and climate action.

Bankruptcy can have devastating effects on the normal people’s lives, as it can lead to inflation, unemployment, poverty, social unrest, violence and migration. For example, in Lebanon, which defaulted on its debt in 2020, the currency has lost more than 90% of its value, prices have skyrocketed, banks have imposed capital controls, electricity and fuel shortages have become chronic, and more than half of the population has fallen below the poverty line.

There are many countries that are on the list of going to be bankrupt, some are hesitant to announce but the inflation and the current de-evaluation of currencies are showing horrific figures.

Bankruptcy can also have spillover effects on other countries and regions, as it can trigger financial losses, market turmoil and trade disruptions. For instance, the failure of Silicon Valley Bank in 2023, which was heavily exposed to emerging markets debt, could spark a run on other regional and mid-sized banks across the US, as wealthy individuals rush to pull their money out of accounts too large for FDIC coverage and flee to larger, more stable institutions amid fears the risk could be systemic.

Experts warn that the international community needs to act urgently to prevent a debt crisis from spiraling out of control and undermining the global recovery. They call for debt relief, restructuring and cancellation for the most vulnerable countries, as well as increased financial support and cooperation to address the health and climate emergencies.