Insufficient national creditworthiness

Low national credit rating
Uncreditworthiness of developing countries

Nature

The external debt of many countries is large and growing rapidly. Without doubting the solvency or good faith of the issuer, bond-holders may legitimately wonder whether the foreign exchange will be available to service any loan. The larger a country's debt servicing requirements relative to its foreign exchange earnings, the more vulnerable it is to default in the face of sharp unexpected declines in earnings or increases in import requirements. Uncertainties concerning the attitudes of present or future governments of a country before the maturity of a debt may also cause potential lenders to hesitate to buy bonds issued even by a highly respected borrower, for future payments of interest and amortization could be put in jeopardy by official action.

The creditworthiness of a country is largely determined by its standing with the IMF, especially in the case of debtor countries where negotiations with other donors are underpinned by IMF programmes. Perceptions of reduced creditworthiness of such countries prompt commercial banks to withhold new financing and in many cases to reduce their net claims on poorer debtor countries.

Background

The global significance of insufficient national creditworthiness emerged prominently during the 1980s debt crises, when several countries faced sudden loss of access to international capital markets. Subsequent financial shocks, such as the Asian financial crisis of 1997 and the Eurozone sovereign debt crisis, further highlighted the systemic risks posed by nations unable to meet credit obligations. Over time, international institutions and rating agencies have increasingly scrutinized national creditworthiness as a critical factor in global economic stability.

Incidence

Insufficient national creditworthiness has affected numerous countries across all continents, often resulting in restricted access to international capital markets, higher borrowing costs, and reduced foreign investment. This problem has led to economic stagnation, social unrest, and the need for international bailouts, with ripple effects on global financial stability. The scale of the issue is evident in the recurring downgrades of sovereign credit ratings and the persistent vulnerability of emerging and developing economies.
In 2022, Sri Lanka experienced a severe manifestation of insufficient national creditworthiness when it defaulted on its foreign debt for the first time in its history. The crisis triggered acute shortages of essential goods and widespread protests.

Claim

Insufficient national creditworthiness is a critical threat to a country’s stability and prosperity. When a nation cannot be trusted to meet its financial obligations, it faces soaring borrowing costs, plummeting investor confidence, and devastating economic consequences for its citizens. Ignoring this issue risks triggering financial crises, unemployment, and social unrest. Addressing national creditworthiness is not optional—it is an urgent necessity for safeguarding a nation’s future and global standing.

Counter-claim

The concern over "insufficient national creditworthiness" is vastly overblown. Nations have repeatedly demonstrated their ability to adapt, renegotiate, and thrive despite credit downgrades or fiscal warnings. Global markets are resilient, and the fear-mongering around credit ratings serves only to distract from real issues. History shows that economies recover and grow regardless of temporary credit concerns. Frankly, this so-called problem is little more than a manufactured crisis with minimal real-world impact.