The author is co-chair of the Bretton Woods Commission Working Group on Sovereign Debt

Since late February, the world’s attention has been on Russia’s brutal invasion of Ukraine. However, non-oil-exporting developing economies in Africa, Asia and Latin America will feel some of the most damaging economic and financial effects of this aggressive behavior.

Even before the invasion, many of these countries were already in debt distress, reflecting the pressure on their response to the Covid-19 pandemic. Recent events in Ukraine have made the prospect of a new sovereign debt crisis even more looming and damaging.

In addition to the potential downside risks for these countries, the current mechanisms for dealing with sovereign debt have failed. While the need for reform has been recognized before, the G20’s recent efforts in this direction appear to have failed. A renewed international action is urgently needed to prevent a paralyzing stalemate. However, the current crisis will make finding solutions more difficult, just as it increases the cost of failure.

The additional risks posed by recent events for low-income countries are self-evident: the economic and financial fallout from the conflict in Ukraine – including unprecedented sanctions on Russia and the expected default on its sovereign debt – has Global growth forecasts, but upward revisions to near-term inflation expectations.

Before the war began, the impact of the pandemic on public spending and revenue in low-income countries increased their total sovereign borrowing by about 50%. 25% their gross domestic product. That increase was slightly higher in percentage than for high-income borrowers, as World Bank data show. However, as IMF calculations show, the cost of debt servicing in these countries has grown significantly higher relative to government revenue than in high-income economies.

Cooperative policy action after the Covid-19 hit averts an immediate debt crisis for low-income borrowers. In addition to providing new financial support programmes, the IMF and World Bank agreed in May 2020 on a Debt Servicing Suspension Initiative (DSSI), which was subsequently approved by G20 finance ministers and eventually extended to all multilateral and Bilateral official loan until the end of 2021.

As DSSI ends, a key challenge is to make low-income countries’ debt exposure sustainable. Undoubtedly, this requires the establishment of a viable sovereign debt restructuring mechanism. However, as noted in the World Bank’s latest World Development Report, the G20’s efforts to establish a new debt renegotiation system — a common framework for debt management — appear to have failed.

according to analyze The Bretton Woods Working Group on Sovereign Debt believes that a key factor that severely undermines existing sovereign debt renegotiation arrangements is the lack of transparency on the size and terms of outstanding debt. This partly reflects a sharp shift in lending sources for low-income countries after the global financial crisis. China is now the largest single lender to these borrowers, but Chinese institutions are often unable to provide consistent or complete reporting of loan data.

The immediate goal of reforms should be to make real progress in transparency, while addressing the challenges associated with enhancing participation, equity and trust in the sovereign restructuring process. To be successful, reforms must go beyond simple data transparency to bring clarity to the entire restructuring process. It won’t be easy or quick: the latest communique from G20 finance ministers supports the goal of greater debt transparency, but really only mentions existing — and apparently failed — efforts.

Still, progress is possible. The working group has developed a series of concrete steps that can effectively reduce the risk of crisis. The key uncertainty is whether the major players will be able to cooperate meaningfully, or whether the current spiral of great-power confrontation will prevent mutually beneficial action. Global leadership is urgently needed. The potential costs of failure include a new sovereign debt crisis that will hurt the poorest and most vulnerable the most.