Countries facing high debt service often reduce health, education and infrastructure spending. The reason is the order in which claims on the budget are met.
Debt service has priority in practice
Missing a scheduled payment triggers default, which raises future borrowing costs and can restrict access to credit markets for years.
Because the consequence is immediate and severe, governments treat debt service as a fixed obligation and adjust elsewhere.
Spending that can be reduced without a legally defined consequence therefore absorbs the adjustment, and much social spending falls into that category.
Wage bills, medicines, textbooks and maintenance are also administratively easy to defer, which is why they move first even where they are politically difficult.
Currency mismatch amplifies the burden
External borrowing is frequently denominated in a foreign currency while revenue is collected domestically, so the cost depends on the exchange rate.
A depreciation raises the local currency cost of the same payment without any new borrowing, and depreciation often coincides with weaker revenue.
Domestic borrowing avoids the mismatch but can compete with private lending and raise interest rates within the economy.
Countries dependent on a narrow range of exports face a further link, since the same shock that weakens the currency often reduces the revenue available to service the debt.
Refinancing conditions shift unpredictably
Most sovereign debt is refinanced rather than repaid outright, so the cost depends on conditions when each maturity arrives.
Global interest rate changes affect all borrowers at once, and countries perceived as riskier face the largest increases in spreads.
Short maturities require frequent refinancing, which increases exposure to whatever conditions prevail in any given year.
Restructuring involves many creditors
Debt is now owed to a mixture of official lenders, bondholders and commercial creditors, each with different mandates and legal positions.
Relief generally requires broad participation, since creditors who decline to participate benefit from concessions made by others.
Negotiations therefore take time, and countries frequently continue paying at unsustainable levels while discussions proceed.
Collective action clauses in bond contracts allow a qualified majority of holders to bind the rest, which addresses part of the problem for newer issues but not for older ones.
The spending cut has delayed costs
Reductions in health and education spending produce effects over years, so the cost appears long after the budget decision that caused it.
Deferred infrastructure maintenance is similar, since repair postponed becomes replacement later at considerably greater expense.
Frameworks for sustainability assessment and restructuring are set by international institutions and creditor groups and continue to change, so arrangements differ by country and period.