Hypothetical applied case

Sovereign Debt and Fiscal Crises

When do interest, growth, primary balances, currency and refinancing combine into acute debt stress?

Teaching scenario, not a real country · Reviewed 10 October 2026

Scenario

The fictional economy of Coastland has gross public debt equal to 78% of GDP. Forty percent is foreign-currency debt, one quarter matures within two years, the effective nominal interest rate is 8%, nominal GDP growth is expected at 5%, and the primary deficit is 2% of GDP.

Approximate debt dynamics

Using Δd ≈ ((r − g) / (1 + g))d − pb, with pb defined as the primary surplus, the interest-growth term adds about 2.2 percentage points and a 2-point deficit adds another 2 points. Before valuation and other adjustments, debt rises roughly 4.2 points of GDP.

All figures are invented. The approximation omits exchange-rate valuation, bank recapitalization, privatization, arrears and stock-flow adjustments.

Risk map

Solvency path: Interest, growth and primary balances determine the direction of the ratio, but forecasts are uncertain and policy affects growth.

Liquidity: A long-run sustainable path can still face crisis if large maturities cannot be rolled over.

Currency: Depreciation raises the local-currency burden of foreign-currency debt even before new borrowing.

Decision options

OptionPossible benefitMaterial risk

Fiscal adjustmentImproves primary balanceCan reduce output and revenue if poorly timed

Maturity reprofilingRelieves near-term rollover pressureMay not restore solvency

Debt restructuringCan reduce debt serviceDistribution, litigation and market-access costs

Decision task

Your debt-risk brief

Recommend an option conditional on a baseline and downside scenario. Include debt perimeter, currency, maturity profile, creditor composition, social protection and one assumption that could reverse the result.

Sources and indicator correction

DT.DOD.DECT.CD reports total external debt stocks, which can include public, publicly guaranteed and private nonguaranteed external obligations. It is not the same as sovereign debt and cannot anchor a government debt-sustainability conclusion by itself. Sources checked 10 October 2026.