In several Latin American countries, debt interest absorbs a significant share of public resources. IMF data places regional gross debt at around 56% of GDP in 2015 and 71% in recent years. A growing number of countries have seen this ratio increase between 2019 and 2025. The continent is not alone: Italy and several African states follow the same trajectory.
The essentials
- In Latin America, IMF data places regional gross debt at around 56% of GDP in 2015 and 71% in recent years.
- In several countries in the region, debt service absorbs a significant share of resources devoted to health, education, and climate.
- The mechanism is self-reinforcing: the less invested in people and growth, the more debt weighs on a stagnant GDP.
- Escaping this trap without sacrificing the social sector requires, in some cases of unsustainable debt, prior restructurings that few governments have the political capital to undertake. Other countries can restore their sustainability through concessional financing or other measures, on a case-by-case basis.
- Room for maneuver exists: tax administration, expenditure selection, and certain debt-for-investment conversion mechanisms can open fiscal space without waiting.
Debt at the expense of the social budget
It all starts with simple mechanics. A state borrows to finance current spending, its debt grows, interest rates rise with perceived risk, and interest payments eventually absorb a growing share of tax revenues. What remains to build a school or finance a vaccine shrinks a little more each year. Economists call this a debt trap. The region presents debt vulnerabilities, but the projected interest-growth differential for 2022-2025 was slightly favorable for the region.
The region is one of the most unequal in the world. It needs massive public investment in education, health, and infrastructure to move beyond a growth model based on raw materials. But its public finances, weakened by successive crises in 2015-2016, then by the 2020 pandemic, then by the rate shock of 2022-2023, have limited capacity constrained by interest payments. The debt-to-GDP ratio increased in a significant number of countries between 2019 and 2025. Some states devote a growing share of their resources to debt service.
The rise in debt service reduces available fiscal space for education, health, and climate investment, all else equal. This budgetary choice results from structural constraints that few leaders openly acknowledge. Debt lengthens timelines and reduces the margins available for human development.
A trap that closes faster than it opened
Latin America was not always in this situation. In the 2000s, the region had reduced its debt, benefited from the commodity supercycle, and created real fiscal margins. Brazil, Colombia, and Peru had consolidated their finances. Some economists spoke of a “Latin American moment” at the time.
The 2015-2025 period called into question several of these gains. The fall in oil and copper prices hit the budgets of exporting states. Venezuela experienced severe political and economic instability. Argentina chained IMF programs without stabilizing its fiscal trajectory. The pandemic forced emergency spending everywhere, financed by debt.
Then the U.S. Federal Reserve raised its rates at its fastest pace in nearly thirty years in July 2022. This increase can raise refinancing costs in dollars, particularly for countries with high financing needs or near-term maturities.
The result is that several states that presented solid fundamentals in 2019 are experiencing deterioration in their budgetary position. Interest rates are an important determinant among several factors in debt dynamics, which accelerates indebtedness in some countries in the region. When the implicit interest rate on debt exceeds the nominal growth rate of the economy, debt grows on its own, even if the state balances its primary budget. This situation characterizes a growing number of countries in the region.
A dynamic shared far beyond Latin America
Italy presents the same diagnosis at the European scale. Its public debt exceeds 135% of GDP. Its spread with Germany remains around 130 to 150 basis points, a sign that markets factor in a structural risk premium. Italian debt interest absorbs around 4% of GDP each year, more than many countries of similar size devote to public investment. Italy benefits from European solidarity and the ECB, which spares it from an open spiral.
But its fiscal space is as constrained as that of Costa Rica or Ecuador: any additional spending must be financed by additional revenue or a cut elsewhere.
In sub-Saharan Africa, several Francophone states crossed critical thresholds after the pandemic. Zambia formally defaulted in 2020 and obtained a restructuring in 2023 under the G20 Common Framework. Ghana suspended payments in 2022 and negotiated a restructuring with its private creditors. These cases show that the combination of foreign currency debt, commodity dependence, and a rate shock produces the same structural effects on several continents.
The debt trap strikes states whose fiscal revenue structure is too narrow, whose debt is partially denominated in foreign currency, and whose potential growth is insufficient to absorb debt service. These three conditions can appear on any continent.
Escaping the trap without sacrificing the social sector: narrow paths
The question has no simple answer, but it has documented answers. Several countries have succeeded in stabilizing and then reducing their debt without sacrificing human investment. The mechanisms they used merit examination.
The first lever is tax administration. In many Latin American countries, the gap between theoretical and actual revenues is considerable. ECLAC estimates that tax evasion and unvalorated tax expenditures represent several percentage points of GDP in countries like Peru, Colombia, or Mexico. Uruguay significantly closed this gap in the 2000-2010 period by modernizing its administration and widening the income tax base. The issue concerns effective collection of existing revenues, not raising rates.
This is politically difficult because beneficiaries of tax exemptions often have the means to resist. But it is the least destructive path for social balance.
The second lever is debt-for-investment conversion. Mechanisms like debt-for-nature swaps allow an overburdened state to negotiate with its creditors a reduction in nominal debt in exchange for commitments to invest in environmental or social programs. Ecuador and Gabon have used these instruments in recent years. Barbados made it a central element of its restructuring strategy. These mechanisms remain modest in volume: they do not resolve a systemic debt crisis.
But they open targeted fiscal space where investment is most needed and signal new discipline to markets.
The third lever is restructuring itself. It is politically costly, economically painful in the short term, and long to negotiate. But when the trajectory is unsustainable, restructuring is better than brutal adjustment through compression of social spending. Zambia took three years to conclude its agreement. Ghana is still negotiating with its private creditors.
These processes are slow, but they show that multilateral restructuring architectures, despite their shortcomings, produce results.
What one generation will pay for another
Public debt is fundamentally an intergenerational choice. The generation that contracts the debt benefits from it. The generation that pays the interest suffers it. And the generation that inherits degraded infrastructure, an underfunded health system, and unaddressed climate pays a triple price.
In Latin America, this equation is particularly tense. The region is aging: its demographic window, where the working-age population is maximized relative to dependents, gradually narrows according to ECLAC projections. Countries that defer investment in human capital and energy transition face growing risks of reduced capacity to carry out these transitions later. Deferred investment costs more afterward, when the working-age population is smaller, pension obligations heavier, and climate change effects more visible.
The climate dimension aggravates the equation. Central American and Caribbean countries are among the most exposed to hurricanes, droughts, and rising seas. A lack of resilience can increase the risk that disasters deteriorate deficits and debt, though the effect varies by type of disaster, country, aid received, and budgetary response. Climate adaptation thus becomes a condition of fiscal sustainability, not an optional expense. A country that does not adapt will pay twice: in emergency reconstruction and in lost fiscal capacity.
By 2035, three trajectories are plausible for the most exposed countries. The first is adjustment through compression: cuts to social spending to generate a primary surplus, at the cost of weak growth and rising political instability. This is the default trajectory if nothing changes. The second is orderly restructuring, negotiated with multilateral and private creditors, accompanied by targeted investment commitments. It requires political capital and a functioning multilateral framework.
The third is disorderly rupture: unanticipated defaults, currency crises, withdrawal of foreign capital, like Argentina in 2001. It produces significant social costs, particularly for the most vulnerable populations.
The signals that distinguish these trajectories are observable. The direction of tax revenues as a share of GDP matters more than the level of nominal debt: a country that broadens its tax base is on a better trajectory than one that compresses spending. The evolution of five-year credit spreads provides a reading of the risk perceived by markets. And the presence or absence of mechanisms for international coordination on restructuring determines whether countries in difficulty have a safety net or free fall.
Initial measures undertaken in some countries
Not all Latin American countries are in the same situation. The difference between those that fare better and those that sink deeper often comes down to choices made ten years earlier.
Chile has maintained a structural budgetary rule since 2001 that smooths revenues based on the copper price. It does not immunize it against shocks, but it prevents spending in boom times what would be needed in crises. Colombia adopted a similar rule. These countercyclical budgetary discipline mechanisms are simple in principle and difficult in practice because they require resisting political pressure to spend when revenues are high. But countries that maintained them enter crises with more margins.
Costa Rica undertook a tax reform in 2018, after experiencing pressure in the foreign exchange market, which broadened the VAT base and capped growth in current spending. The country regained access to international markets with a euro-bond issuance in March 2023, just over four years after the reform, and had stabilized its debt-to-GDP ratio. This is a documented case of gradual exit from a spiral.
These examples are not exportable models as such. But they show that the debt trap is not inevitable. Policy choices can alter the debt trajectory, which also depends on macroeconomic shocks and external financial conditions. The condition is to act before interest dynamics make margins of maneuver structurally impossible. This is the window that several affected countries are letting close.
The real constraint for years to come is less technical than political: the reforms that open fiscal space—tax administration, spending rules, debt conversions—are known. Insufficient political support is a significant obstacle to certain fiscal reforms, but its general primacy is not demonstrated. The challenge lies there, not in the economics textbook.
Sources
- Moneynews, Latin America facing debt and adjustment
- Moody’s, Sovereign Rating Reports for Latin America 2024-2025
- French Agency for Development (AFD), Macroeconomic analyses Latin America
- ECLAC, Fiscal Panorama of Latin America and the Caribbean 2024
- IMF, Fiscal Monitor, 2023 and 2024 editions
- World Bank, Public Debt Data Latin America and the Caribbean
