In the face of the often stark increases in poverty seen in the rich world since the pandemic and the inflationary crisis that has followed, the debt crisis currently afflicting the poor world has failed to breach the public consciousness in the Global North.

In fact, the Global South debt crisis has been rumbling away behind the scenes for nearly two years now—only ever making headlines when a middle-income nation like Lebanon or Argentina announces it is unable to repay its debts.

The dynamics of the international financial system that underpin this crisis are complicated, so it’s worth delving into them in detail.

When the pandemic hit, the trade flows that link disparate parts of the global economy together ground to a halt. This meant that income dried up for many nations, especially those most heavily dependent upon exports.

Along with this slowdown in trade came a sharp reversal of investment flows—otherwise known as capital flight. In the first half of 2020, there was a rush out of assets perceived as risky—like the government debt of poor countries—and into assets perceived as safe—like the government debt of rich countries.

The loss of income from trade combined with the sudden loss of international investment sent the currencies of many Global South states tumbling. This, in turn, made importing goods—including basic necessities like food and fuel—much more expensive, constraining production and exacerbating poverty.

Of course, a less valuable currency should also make a country’s exports more competitive internationally. Even in good times, this second effect tends to lag behind the first. But during the pandemic, when trade effectively froze, it was nearly non-existent.

Such a situation would be bad enough for the people living in these nations, were it not for the fact that it also impeded their governments’ ability to repay their debts.

The problem for Global South states is that the majority of their debt is generally owed in dollars, or some other foreign currency. As the head of the United Nations Conference on Trade and Development reminded the world at the end of last year, between 70% and 85% of developing country debt is denominated in a foreign currency.

In a country like the US or the UK, the government issues debt denominated in the national currency—the dollar or sterling. When the currency declines in value relative to another currency, the relative value of the government debt also declines.

For example, say the value of sterling was to decline 10% relative to the value of the dollar. A US investor holding UK government debt would receive interest payments on that debt in sterling and convert them into dollars.

So, when the value of sterling declined relative to the value of the dollar, so would the dollar value of the interest payments they received. Were the investor to sell the asset, they would find that its dollar value had also declined due to the reduced value of the interest payments.

In other words, the UK government isn’t on the hook for the investors’ losses—the investor is. This is the great privilege of being able to borrow in one’s own currency.

It also explains the risk investors take when they invest in assets in a foreign currency—the value of the currency might decline relative to other currencies. This could be seen as part of the normal risk of doing business. Investment, after all, is all about managing uncertainty.

But making lots of money from investing is all about reducing the risks associated with uncertainty. This is a big part of the reason why investors have expended a lot of effort throughout history attempting to peg currencies to ‘real’ prices like gold.

It’s also why they prefer to lend to poor countries when the debt is denominated in dollars.

On the one hand, this means that poor countries can access more international investment than might otherwise be the case. On the other hand, it means that as soon as an economic crisis hits, it quickly multiplies into a debt crisis.

If the value of the Zambian Kwacha falls 10% relative to the dollar, but Zambian debt is denominated in dollars, the interest on that debt has to be paid in dollars. That means the government has to part with more Kwachas to access the dollars needed to service the debt.

Yet the devaluation is often triggered precisely by the fact that the amount of dollars flowing into the economy has fallen. Maybe there has been a decline in income from trade. Or maybe a global economic shock has reduced capital flows. In the case of Covid, both happened at the same time.

Governments in poor states were forced to find more dollars to service their international debts at the same time as most of the worlds’ dollars were flowing back into the safe haven of the US. Unsurprisingly, this resulted in a deep debt crisis—arguably deeper than the one that afflicted the Global South in the 1980s.

The world’s fairly feeble response was to announce a moratorium on debt repayments while the Great Lockdown continued. In effect, interest payments on government debt for most countries would be frozen until the pandemic was over.

But this ‘solution’ failed to deal with the underlying issue that the value of the outstanding debt owed by the poor world had increased sharply.

This might not have been such an issue had the world economy quickly reverted to the pre-Covid status quo, with the currencies of poor countries recovering quickly. Instead, prices quickly started to skyrocket, and the cost of living crisis picked up where lockdown had left off.

On the one hand, some oil exporters and commodities exporters profited from rising prices. Large exporters with nationalised oil sectors or high taxes on commodities exports often saw their incomes rise as prices rose.

But those states that weren’t able to generate much income from the rise in commodities prices—either because they weren’t significant exporters or because their economies were dominated by extractive foreign corporations—suffered deeply.

And when interest rates began to rise in the rich world as inflationary pressure deepened, capital flows out of these countries sped up as investors sought out the higher returns available in the Global North.

These states experienced all the drawbacks of rising commodities prices with few of the benefits. The economic chaos this generated also constrained trade flows and investment, exacerbating the impact of the pandemic on their currencies and worsening the debt crisis.

To make matters worse, many of these states were either in or on the brink of debt distress before the pandemic hit. According to the Jubilee Debt Campaign, at least 34 countries were in debt default or at high risk of being so at the start of 2020, compared to just 17 in 2013.

Some of the poorest states in the world are now facing a debt crisis of unfathomable proportions. The United Nations Development Programme assessed that 54 developing economies were in debt distress. At least half of all people living in poverty live in these 54 countries.

And the situation is only likely to deteriorate. Poor countries will struggle to roll over their debts if they are unable to make existing repayments, let alone access further borrowing for investment. The economic prospects of these nations will continue to decline as a result, while their debt crises deepen.

To make matters worse, many of these states are on the front line in the battle against climate breakdown. They are facing increased extreme weather events, desertification, rising sea levels, declining agricultural productivity and many other risks thanks to the overlapping ecological crises caused largely by the rich world.

These states will need to access significant amounts of investment just to mitigate the impact of climate breakdown on their economies, let alone begin investment in decarbonisation. Yet they will be unable to access this investment if they can’t repay their existing debts.

The last time the world faced a similar situation was in the 1980s, when sharp interest rate rises in the US triggered capital flight out of the Global South. Then, as now, much of the debt owed by poor countries was denominated in dollars.

But today, a significant portion of the international debt of the poor world is owed to the Chinese state. Pressure is mounting on China to reach agreements with debtor countries to write down some of the debt it is owed.

Yet the CCP has little incentive to do so if it knows that any debt relief it provides will simply flow directly into the hands of wealthy private investors in the rich world, who are often the last parties to agree to any restructuring process.

In the past, some private investors have deliberately held up debt restructuring processes, hoping to force the government in question into default and then sue the state for failing to repay its debts. This is precisely the situation that befell Zambia in the wake of the financial crisis when a vulture fund held some of the poorest people in the world to ransom to protect its wealthy investors.

As the United Nations Conference on Trade and Development has frequently called for, what is needed is an international agreement on debt restructuring. Such an agreement needs to include all lenders and borrowers and force any recalcitrant parties to abide by an agreement made by others.

The alternative is for the ‘international community’ to stand by and watch as what little progress has been made on tackling poverty over the past decade is eradicated in the coming years. Such a choice would show, once and for all, the hollowness of the world’s apparent commitment to sustainable development.