External publications

Public debt and resilient futures in Latin America and the Caribbean

Volz, Ulrich / María Fernanda Espinosa / Alexander Dryden
External Publications (2025)

Debt relief for green and inclusive recovery (Policy Brief), Berlin and London: Heinrich Böll Stiftung/Centre for Sustainable Finance

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The region of Latin America and Caribbean (LAC) faces a triple challenge of high debt burdens, intensifying climate shocks, and stalled progress towards the Sustainable Development Goals (SDGs). Average gross public debt has reached 70 per cent of gross domestic product (GDP), with external obligations surpassing US$1 trillion in 2023. In several countries, debt servicing now exceeds spending on health or education, crowding out critical social and climate investments. Rising borrowing costs, sharp currency depreciations, and repeated cli- mate disasters are compounding fiscal stress. Average sovereign bond yields across the region now exceed 10 per cent. Caribbean small island developing states (SIDS) are especially vulnerable, with some disasters causing damages of more than 100 per cent of GDP. These dynamics risk locking countries into a vicious cycle in which debt distress limits climate and development investment, which in turn heightens vulnerability to future shocks. A regional heatmap of debt, cli- mate, and SDG performance shows that 20 countries – representing 81 per cent of GDP in LAC – face high composite risk. Governments in LAC have pioneered innovative debt instruments to build fiscal resilience. Debt-for-nature swaps have re-emerged, with Belize, Barbados, Ecuador, and the Bahamas executing large-scale trans- actions since 2021. Caribbean states have also led in adopting “disaster pause” clauses, which temporarily suspend debt service after natural disasters. These innovations provide useful relief but face high transaction costs, complex structures, and political sensitivities, limiting their broader adoption. To break the cycle of vulnerability, a reformed debt and climate finance architecture is urgently needed. Current debt sustainability analyses fail to sufficiently incorporate climate risks or the investment needs for achieving the SDGs. A new framework should integrate these dimensions to distinguish between countries that need deep restructuring and relief and those that require liquidity support. Without proactively tackling sovereign debt challenges, the region risks a lost decade marked by repeated crises, fiscal instability, and development setbacks. With coordinated international action, however, LAC can secure fiscal resilience, scale up climate adaptation, and chart a sustainable and inclusive growth pathway.

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