Abstract This paper explores how developed and developing economies manage sovereign debt crises in the post-pandemic era, amidst a backdrop of inflation and slow growth. Fiscal and monetary stimuli in advanced countries increased global debt, with tighter monetary policy dampening domestic demand, weakening real economy investment, and diminishing the impact of expansionary fiscal measures. Developing nations face higher interest costs due to rate hikes by major economies, and adopting tight policies could lead to financial bubbles and underfunded real sectors. Inflation spikes exacerbate their debt burden, while diversified economies like Germany are more resilient compared to those heavily dependent on a single industry or foreign capital, as seen in Greece. Post-2023, central banks' shift to monetary easing eases debt burdens in advanced markets, boosts domestic growth, and provides capital inflows for emerging economies, reducing their debt servicing costs and crisis risk. Tackling the sovereign debt crisis requires international macro-policy coordination, with developed economies considering spillover effects on global economic stability. International support, such as debt relief, is vital to enhance resilience and sustainable development in vulnerable economies. All countries must tailor monetary and fiscal strategies to national conditions to navigate economic uncertainty and mitigate sovereign debt risks effectively. Keywords: Sovereign debt crisis, Industrial composition, External dependency, Financial stability, Debt sustainability.

business, or, more rarely, a government, be unable to pay all of its debt obligations and find itself in bankruptcy … employment, wages, interest rates, and the like that provide the focus of what is to be explained. To complicate … setting of interest rates by central banks—has a more immediate effect. By setting interest rates too low

This paper investigates whether persistent increases in the effective interest rate on government debt trigger non-linear, explosive debt dynamics in advanced economies. Using an annual panel of 34 advanced economies from 2004 to 2025, we employ panel local projections (Jordà, 2005) and Hansen (1999) threshold estimation. A one-percentage-point increase in the effective interest rate raises the debt-to-GDP ratio by 11.1 percentage points after three years in countries with initial debt above 90 % of GDP (p = 0.008), with no significant effect below that threshold. Hansen threshold estimation identifies two breakpoints: 70.7 % and 112.7 % of GDP, with the snowball coefficient rising from 0.20 to 0.97 to 1.47 across regimes (p = 0.004 for the second threshold). A Bohn (1998) fiscal reaction function shows a positive fiscal response to lagged debt (coefficient 0.033, p = 0.002) when the interest-rate-growth differential is negative, but the response halves and becomes insignificant when r > g (interaction-0.0145, p = 0.007). These results are consistent with a non-linear debt-interest spiral, with a critical danger zone above 90 % of GDP. Policy implications include state-contingent fiscal rules and recognition that monetary tightening imposes binding fiscal constraints in highly indebted economies.

would be cut. The government would be unable to pay pensions and salaries with euros, and … go back to the drachma in order to be able to pay. So no one will force us out. But … lead to higher interest rates and a threat to our credit rating as a country.’ He spread

short-term deficit spending (stimulus) can cause interest rates to rise, resulting in a reduction in private investment, which in turn reduces economic growth. In economic policy, austerity is a set of political-economic policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both. There are three primary types of austerity measures: higher taxes to fund spending, raising taxes while cutting spending, and lower taxes and lower government spending. Austerity measures are often used by governments th In economic policy, austerity is a set of political-economic policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both. There are three primary types of austerity measures: higher taxes to fund spending, raising taxes while cutting spending, and lower taxes and lower government spending. Austerity measures are often used by governments that find it difficult to borrow or meet their existing obligations to pay back loans. The measures are meant to reduce the budget deficit by bringing government revenues closer to expenditures. Proponents of these measures state that this reduces the amount of borrowing required and may also demonstrate a government's fiscal discipline to creditors and credit rating agencies and make borrowing easier and cheaper as a result. In most macroeconomic models, austerity policies which reduce government spending lead to increased unemployment in the short term. These reductions in employment usually occur directly in the public sector and indirectly in the private sector. Where austerity policies are enacted using tax increases, these can reduce consumption by cutting household disposable income. Reduced government spending can reduce gross domestic product (GDP) growth in the short term as government expenditure is itself a component of GDP. In the longer term, reduced government spending can reduce GDP growth if, for example, cuts to education spending leave a country's workforce less able to do high-skilled jobs or if cuts to infrastructure investment impose greater costs on business than they saved through lower taxes. In both cases, if reduced government spending leads to reduced GDP growth, austerity may lead to a higher debt-to-GDP ratio than the alternative of the government running a higher budget deficit. In the aftermath of the Great Recession, austerity measures in many European countries were followed by rising unemployment and slower GDP growth. The result was increased debt-to-GDP ratios despite reductions in budget deficits. Theoretically in some cases, particularly when the output gap is low, austerity can have the opposite effect and stimulate economic… Austeri…