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Among warnings of ‘perma-pandemics’ and digital threats, rising��government debt is officially on the World Economic Forum’s watch list for 2023.��

The , said levels of debt held by countries were accruing and increasing the chance of default.��

The term ‘debt’ might make many of us think guiltily about credit cards or private mortgages. But when it comes to debt held by countries, the consequences of not paying national debt can have a massive impact��–��not just on the individual but on the population as a whole.����

Consider one country that defaulted on its debt semi-recently. Just last year, economic mismanagement and the COVID-19 crisis wiped out Sri Lanka’s tourism income. This resulted in a political crisis, which brewed from rising prices for basic goods, power blackouts and massive inflation.��

“Sri Lanka’s recent [economic] crisis provides a very real example of the spiralling risks to human security and health that can arise from economic distress,” commented the 2023 Global Risks report.��

Yet, Associate Professor Alexandre Jeanneret, School of Banking and Finance at �ʹڲ�Ʊ Business School, says the report is being “a bit dramatic” when it comes to earmarking debt as a global and widespread risk.��

“The risk of widespread sovereign defaults isn’t that high, especially the risk of default contagion," he said, referring to possible spread of market disturbances across countries.��

So, what could happen as public debt rises? And how might it impact Australia and beyond? �ʹڲ�Ʊ Business School academics explain.��

What is public debt default, and why is it a problem?��

Simply put, public debt default is when a nation state owes sums to a debt holder, and that nation breaches the agreement through late or non-payment.

It's a situation that is more common than you might think: Ghana, Sri Lanka and Russia all defaulted last year.��

Default contagion or ‘clustering’ is when economic disturbances spread – for example, when in 2001, Argentina underwent a financial crisis, it then impacted one of its main trading partners, Brazil.��

Gabriele Gratton, a Professor at the School of Economics, �ʹڲ�Ʊ Business School, says there are clear political risks that come with high levels of public debt.��

“It may create tensions between sectors of the population who may have differential risks associated with the possibility of a default, or the consequences of austerity measures to avoid the default,” he says.��

Professor Gratton says such conflicts may lead to political instability with long term consequences.����

“In mild cases (as we’ve documented ) this may lead to the long-term deterioration of the quality of the bureaucracy, the legislation, and in general the functioning of the economy.����

“In more extreme cases, we may see the rise of illiberal regimes (see my recent work on ) or the rise of populist, majoritarian and illiberal demands that may even lead to the collapse of democratic institutions and the rise of autocracies.”��

"This can have knock-on effects as the perception of institutional, political, and economic instability may be contagious.”��

See also:

Why does the World Economic Forum think we are likely to see more sovereign debt defaults?��

There are lots of reasons countries might be more likely to default on their debt. A/Prof.��Jeanneret says most countries have substantially increased their levels of debt.��

“One reason is that for the last decade interest rates were very low,” he explains. “When this happens, countries have an incentive to increase their indebtedness level because the cost of issuing additional debt drops substantially. The second is because of the pandemic crisis.”��

“Governments had to invest massive amounts of money to stimulate the economy with the aim of avoiding corporate bankruptcies and calming financial markets as well as giving monetary help for those who couldn't work.”������

(Australia was not immune to this. , the government’s gross debt will be around $963 billion as of 30 June 2022, and is .)��

The result is that lots of countries were left with a large debt level, says A/Prof.�� Jeanneret, with a sharp contraction in economic activity, making for a high debt-to-GDP (gross domestic product) ratio.

To make matters worse for the countries in debt, interest rates have also taken an upturn, with central banks recently raising interest rates to fight��inflationary pressure.����

And while the general