A global debt crisis threatens economic stability and development. It has been fuelled by low interest rates, expansive fiscal policies, global economic shocks and fundamental economic vulnerabilities in both rich and poor countries.
In the lead up to the Global Financial Crisis (GFC), banks and investors borrowed more money than they had, in order to expand lending or buy mortgage-backed securities (MBS). Increasing leverage magnifies potential profits but also increases the severity of losses. As a result, when house prices started to fall and credit markets began to freeze, the banks and investors incurred huge losses. This led to the collapse of several major financial firms, a global recession and widespread job losses. In developing countries, rapid debt build-up can trigger a similar crash with devastating consequences for people. The debt service costs of a growing debt pile force governments to divert resources to repaying their loans and away from vital public investments in infrastructure, education and health. These cuts weaken economic growth and can cause countries to become stuck in a cycle of high-interest debt servicing payments.
The Church believes that the best way to tackle this problem is through a holistic approach that includes economic and structural reforms, debt relief and international cooperation. This should be based on principles of transparency, equity and sustainable development. As with personal debt, it is important to ensure that any money gained from debt relief is not spent irresponsibly or illegitimately. The Church is therefore committed to continuing its work on the rescheduling of debt and debt relief to help alleviate this global crisis.
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