A debt crisis is a situation when paying debts is causing an increase in poverty and inequality in a country. Debt crises have a detrimental impact on public services, leading to a loss of funding for schools, hospitals and other vital services.
Government debt can be owed to people and companies in the same country as the government – known as domestic debt – or to institutions and companies in other countries – known as external debt.
Debt can be useful for governments to invest in ways which help society, or to manage temporary problems. But when debt payments get too large they can lead to governments making drastic cuts in vital services, such as healthcare or education. It can also hand power to creditors to tell debtor governments what to do.
Domestic debts tend to be easier to manage. External debts often cause more problems as they lead to money leaving the country. Paying external debts therefore leads to worse impacts on the economy of a country.
External debts also tend to be owed to powerful countries and institutions such as the International Monetary Fund (IMF), World Bank or global banks, financial companies and oil traders. These institutions can use debts to impose harmful economic policies on the debtor country.
Debts owed by private companies have caused debt crises in East Asia in the late-1990s and the global financial crisis and Eurozone debt crisis of 2008-2015.
What happens during a debt crisis?
In a debt crisis, governments often reduce their spending because of a lack of funds, or because creditors say they have to. This can lead to worse public services including healthcare and education, cuts to welfare and anti-poverty programmes and cuts to investment in vital infrastructure, which can hold back a country for years to come.
Financial speculators often take their money out of a country, leading to the currency falling in value. This increases the cost of imports, increasing prices of necessities for ordinary people. Countries also find it difficult to import vital goods such as medicines.
These impacts mean that poverty often increases during a debt crisis. During the debt crisis that affected many countries in Latin America, Africa and Asia during the 1980s and 1990s, poverty increased dramatically.
Debt crisis in the UK
Three quarters of the UK government’s debt is owed to companies and people in the UK, such as pension funds and insurance companies. This also includes the Bank of England, which owns over 20% of the government’s debt, as a result of the quantitative easing policies of the 2010s following the global financial crash and in response to the Covid-19 pandemic. The Bank of England is now gradually selling off this debt, which is one of the reasons UK government interest rates have increased in recent years. Just a quarter of UK government debt is owed to people and companies outside the UK. This is important because payments on these debts leave the country, whereas domestic payments stay in the local economy.
UK government debt payments which leave the country are just under 7% of the government’s revenue. By contrast, in lower-income countries, on average 17% of government revenue is spent on such external debt payments and in some cases it is far higher.
Between 2008 and 2022 the interest rates the UK government could borrow at were the lowest ever recorded. Those years were a historic opportunity to invest in ways that would save the government and people money, such as social housing, insulation and renewable energy. That opportunity was missed. Government borrowing is now more expensive, and the amount spent on interest payments is higher.
Since 2022, Russia’s invasion of Ukraine, the climate crisis and financial speculation on food and energy have led to large increases in prices. This has put even more pressure on UK households. In 2022 in particular, the UK government borrowed more to fund measures to provide – inadequate – protection for people from the increase in prices. Interest rates have also been rising as Central Banks across the world have attempted to bring inflation down.
This means that interest rates on new UK government borrowing have been rising. As of November 2025, the interest rate for the UK government to borrow a loan due to be repaid in 10 years is around 4.5%, compared to 0% – 2% over the previous decade.
But the UK government’s debt payment burden is still far lower than many lower-income countries. For these countries, Interest rates on loans are much much higher, much of the debt is owed in foreign currencies rather than their own currency, and more of the debt is owed to people outside the country. In such situations, the government debt burden is actually undermining the ability to provide public services and meet basic needs.
About Debt Justice
Debt Justice aims to tackle unjust debt, to stop the boom-bust cycle of debt crises, and to build a financial system that works for everyone, not just the banks, speculators and the super-rich.
We see unjust debt as debt which has been contracted unfairly or undemocratically, or which is being used to fund war and human rights abuses, or which, because of its sheer size, is undermining basic human rights, like the right to good quality healthcare and education, and to nutritious food and clean water.