Many developing countries have very large debts, and the amount of money they owe is quickly increasing. Trying to pay off the debt (debt service) has become a serious problem for these countries, and it causes great hardship for their people.
Take the region of Sub-Saharan Africa, for example. This region pays $10 billion every year in debt service. That is about 4 times as much money as the countries in the region spend on health care and education.
How did the Debt Crisis start?
At the end of the '70's, many oil-exporting countries had large amounts of extra money. They put this money into Western banks. The banks then loaned a lot of money to Third World countries for big development projects. However, several factors (a rise in world interest rates, a global recession, and low commodity prices) caused the size of these debts to start growing very fast; several countries began to fall behind in their payments.
The amount of money owed by developing countries has increased dramatically since the early 1980's. These countries now owe money to commercial banks and also to organisations like the World Bank, the International Monetary Fund, and to First World governments.
Why does the debt keep growing?
It is especially difficult for developing countries to repay loans:
Loans must almost always be paid in hard currency.
Most loans to the Third World have to be repaid in hard currencies. Hard currencies are stable currencies; that means their value does not change very much. The Japanese yen, the American dollar and the Swiss franc are examples of hard currencies.
Developing countries have soft currencies - they go down in value. Therefore, when the value of a developing country's money goes down (as it often does), the cost of its debt rises. It takes more of the country's own currency to pay back the same amount of hard currency.
A HARD CURRENCY has a very stable value. It doesn't change very...