A debt crisis occurs when a country accumulates excessive debt in the international lending market, whether sovereign or private debt, surpassing its ability to repay. This results in an inability to make timely payments or forces debt repayment delays. Such crises not only destabilize a nation's economy but also trigger social unrest and fluctuations in the international financial markets.

Causes of a Debt Crisis：

1. Excessive External Debt

A country’s external debt burden is a primary cause of a debt crisis. Borrowing should remain within reasonable limits, as excessive debt strains government finances. A country's debt repayment capacity is typically measured by the external debt service ratio, which represents the proportion of total external debt repayments to annual export revenue. Under normal circumstances, this ratio should remain below 20%. If it exceeds 20%, the debt burden may become unsustainable, increasing the risk of a debt crisis.

2. Unbalanced Debt Structure

An irrational debt structure further heightens the risk of a debt crisis. This issue manifests in three key ways:

If a country's economic or political environment becomes unstable, international financial institutions may withdraw their lending, leading to a depletion of foreign exchange reserves and triggering a debt crisis.

Debt concentration in specific currencies: If a country’s external debt is predominantly in one or two foreign currencies, fluctuations in exchange rates can significantly impact debt repayment.

If a large portion of debt matures simultaneously, repayment difficulties surge, heightening the risk of a crisis.

3. Misuse of External Debt

A country’s ability to service its debt depends on how effectively it utilizes borrowed funds. If external debt is misallocated—such as being spent on luxury imports or speculative investments (e.g., real estate and stock markets) instead of productive and export-driven projects—it fails to enhance repayment capacity and instead exacerbates the debt burden.

4. Poor Debt Management

Ineffective government management of external debt can lead to uncontrolled borrowing, an unbalanced debt structure, and misallocated funds. When a country accumulates excessive debt without implementing timely policy adjustments, a debt crisis becomes inevitable.

5. Deterioration in Trade Conditions

A country’s ability to repay external debt is directly affected by its trade performance. Declining exports or widening trade deficits force a country to rely more on foreign capital, undermining investor confidence. If this persists, reduced capital inflows and borrowing difficulties intensify repayment pressure, leading to a debt crisis.

Consequences of a Debt Crisis：

1. Decline in Domestic Investment

During a debt crisis, governments often reduce imports to boost trade surpluses. However, this also restricts the import of essential technology, equipment, and raw materials, hindering domestic production and investment. Additionally, the country’s declining creditworthiness prevents access to international capital markets, further reducing investment and slowing economic growth.

2. Rising Inflation

Debt crises are often accompanied by surging inflation. To repay external debt, governments may raise interest rates or issue large amounts of bonds to secure funds. Increased money supply drives up inflation. Moreover, reduced domestic investment and declining production lower supply levels, while import restrictions further exacerbate price hikes, increasing the cost of living.

3. Economic Slowdown

To service its debt, a country must exchange its domestic currency for foreign currency, causing depreciation. A weaker currency raises import costs, making production more expensive and leading to business closures. This results in reduced investment, slower economic growth, and even negative growth.

4. Social Instability

Debt crises lead to economic downturns, business bankruptcies, and rising unemployment, significantly lowering living standards. Inflation erodes purchasing power, worsening public dissatisfaction. When governments cut public spending to prioritize debt repayment, social hardships intensify, increasing the risk of protests and social unrest.

5. Impact on the Global Financial System

If creditor nations refuse to provide financial assistance, the debtor country may face a financial collapse, disrupting international financial stability. Conversely, if creditor nations intervene, they may burden their own economies and potentially trigger other debt crises.

Conclusion

Debt crises typically result from a combination of factors, including excessive borrowing, poor debt structure, and mismanagement. Their impact extends beyond national economic downturns and social instability, placing immense pressure on the global financial system. Therefore, sound debt management and prudent economic policies are crucial in preventing such crises.