Brazil’s debt burden is driven by high interest costs, while low-income countries face sharper refinancing and restructuring risks.
Take interest out of the picture and Brazil’s public sector is close to balancing its books. In the 12 months to July, the consolidated primary deficit, which excludes interest payments, was 0.67 percent of GDP. Interest over the same period came to R$1.15 trillion, or 8.67 percent of GDP, according to the Banco Central do Brasil (BCB, the Central Bank of Brazil), which, on a rough calculation, accounts for more than nine-tenths of the overall deficit. At the Federal Reserve’s August 2026 average exchange rate, that interest bill comes to roughly US$223 billion. That is more than half the US$415 billion the World Bank says all low- and middle-income countries together paid in interest on their external debt in 2024, though the two measures are not strictly comparable. Brazil is not about to default. Its problem is quieter: high interest rates are steadily compounding a debt that is overwhelmingly owed at home, in its own currency, to its own banks, funds and pension plans.
That distinction matters for a popular prescription: that the International Monetary Fund (IMF), the World Bank and the Group of 20 must overhaul debt relief before “refinancing walls” set off financial crises across emerging markets. The evidence supports half of that claim. For the poorest borrowers, bond maturities really are bunching up and the relief machinery is too slow, and its reforms are still arriving. But the strain in large middle-income economies such as Brazil has a different cause and needs a different fix. None of the international relief mechanisms covers it, and none should. Treating the two problems as one invites the wrong remedy for both.
Start with Brazil. Its gross general government debt reached 82.5 percent of GDP in July, by the central bank’s measure. The IMF’s measure also counts treasury securities on the central bank’s balance sheet that are not being used in repurchase operations. On that basis, its July Article IV staff report puts the debt at 93.3 percent of GDP in 2025, 97.8 percent this year and 100 percent in 2027. The Fund’s April Fiscal Monitor singled out Brazil for a particularly sharp rise in interest payments among emerging markets last year. The central bank cut its policy rate, the Selic, on September 16, but only to 13.75 percent. Inflation expectations in its Focus survey stand at 4.9 percent for this year and 4.3 percent for next. The rate-setting committee wrote in its minutes that de-anchored expectations call for tighter policy for longer than would otherwise be appropriate.
What turns a high policy rate into a fiscal problem is the structure of Brazil’s debt. By the end of August, 52.74 percent of the federal debt was in floating-rate securities tied to the Selic, a record in the Treasury’s series. On a rough calculation, that is close to R$4.9 trillion, or about US$950 billion. When the central bank tightens, the cost of that debt rises almost immediately. The share climbed this year as investors grew reluctant to buy long, fixed-rate paper. In August the Treasury raised its year-end target range for floating-rate debt from 46–50 percent to 49–53 percent. It blamed mainly the war in the Middle East and its effect on Brazilian monetary policy, which kept risk premiums high and made longer fixed-rate issuance harder. When the war’s energy shock hit in March, IMF staff recorded that Brazil’s Treasury cancelled regular auctions of inflation-linked and fixed-rate bonds. It also bought back about R$49 billion (US$9.4 billion) of debt in three days to steady the market.
None of this adds up to a refinancing wall in the usual sense. The share of federal debt maturing within 12 months fell to 16.39 percent in August, and average maturity rose to 4.10 years. The Treasury’s liquidity reserve, cash set aside only for debt payments, stood at R$1.208 trillion. That is an estimated US$234 billion, and the Treasury says it covers roughly seven months of maturities. Foreign-currency debt is 3.74 percent of the total, and nonresidents hold less than a tenth of the domestic debt. The same IMF staff report rates Brazil’s risk of debt distress as moderate. It cites government cash buffers of 14.4 percent of GDP, the central bank’s large holdings of government securities, which by law are rolled over automatically, and limited foreign-currency and foreign-law debt.
The same report also spells out where the danger lies. Brazil’s debt keeps rising even on the primary surpluses the IMF projects for the medium term, because the interest rate on the debt exceeds the economy’s growth rate by more than in peer economies in the region. In the Fiscal Monitor’s tables, Brazil’s projected interest rate-growth differential for 2026–31 is 2.8 percentage points, whereas the average for emerging markets is negative. Staff note that about half of Brazil’s government debt is floating-rate and about a fifth must be rolled over each year, which makes the debt path “highly sensitive to interest rate changes.” Market economists surveyed by the central bank expect gross debt to reach 90.37 percent of GDP in 2028, according to the Senate’s budget consultancy. The consultancy also notes that the implicit interest rate on net public debt was 14.58 percent over the 12 months to July. That, it suggests, may mean the Selic cuts have not yet reached the cost of carrying the debt.
The loop runs in both directions. In its September minutes, the central bank’s rate-setting committee warned that weaker fiscal discipline and uncertainty over when the debt will stabilize can raise the economy’s neutral interest rate. That would blunt monetary policy and make bringing inflation down more costly. A higher debt path keeps rates high, and high rates, passed through the floating-rate stock, push the debt path higher. This is a slow squeeze, not a sudden stop. It lands on the budget, not on a creditor committee in Paris. Voters go to the polls on October 4, with a presidential runoff, if needed, on October 25. The next government will have to decide whether to break that loop.
The remedy the IMF proposes is domestic. Staff estimate that stabilizing the debt requires a primary surplus of about 1.5 percent of GDP over the medium term. Measured against the latest 12-month primary deficit, that is, on a rough calculation, a swing of a little over two percentage points of GDP, though the two measures differ slightly in coverage. The Fund’s executive directors also backed a binding medium-term debt anchor, broader spending limits and saving the oil-revenue windfall from this year’s price spike. The Treasury, for its part, says it expects to cut the floating-rate share gradually if the country returns to structural primary surpluses. Nothing in the international debt-relief toolkit reaches this problem. Brazil would not qualify for the G20’s Common Framework, which is open only to the 73 countries that were eligible for the pandemic-era debt service suspension initiative. Its creditors are overwhelmingly domestic. Any suggestion that restructuring was on the table would likely raise the very risk premiums that are driving the problem.
The poorest countries face something much closer to a wall. The OECD’s Global Debt Report 2026 finds that around 36 percent of the outstanding sovereign bond stock of emerging and developing economies matures within three years. For low-income countries the schedule is described as exceptionally heavy: 29 percent of their outstanding bonds fall due by the end of 2026 and 52 percent by 2028. The IMF’s April Fiscal Monitor finds that for B-rated sovereigns, issuance has fallen to nearly a third of its 2017 level and average maturities have shortened from 16 years to 8. Its executive summary adds that among the world’s poorest countries, interest payments “have reached historic highs relative to revenue,” while falling aid is creating gaps “that some countries have been unable to finance.”
The composition of that wall has also changed. The OECD finds the foreign-currency share of low-income countries’ marketable debt fell from 18.7 percent in 2019 to 7.6 percent in 2025. Many turned to local markets as international borrowing became costlier or unavailable. IMF staff note that by 2025 around 40 percent of new domestic debt in low-income countries was issued at short maturities. That has deepened the ties between sovereigns, banks and central banks in shallow financial systems. The World Bank’s chief statistician, Haishan Fu, made a similar point when the International Debt Report was released: domestic borrowing reflects maturing local markets, but it “comes with shorter maturities, which can raise the cost of refinancing.” Here the fear of localized financial crises is best founded. When a government that has financed itself through its own banks can no longer pay, restructuring means losses for those banks. IMF staff noted that Ghana regained access to its local bond market only in April 2026, three years after its domestic debt restructuring.
The strongest objection to the case for urgency is that markets have so far absorbed the pressure. In February, the Institute of International Finance judged that emerging markets’ record refinancing needs of more than US$9 trillion this year looked largely manageable, helped by strong investor demand. Even after the war began, IMF staff found that emerging-market sovereign spreads widened only about 14 basis points between March 1 and April 1. That is a fraction of the move after Russia’s 2022 invasion of Ukraine. The objection has merit, and it cautions against predicting a wave of defaults. But the same IMF note found that primary issuance collapsed in March, when only five emerging and developing economies tapped international markets. It warned that deferred issuance leaves sovereigns exposed to weaker conditions in late 2026, with the risks most acute for lower-rated borrowers with negative net external financing. Brazil could draw on large domestic buffers and its central bank. Frontier borrowers facing near-term maturities have far less room.
The case for reform rests less on how much debt is due than on how long relief takes once it is needed. The Global Sovereign Debt Roundtable, co-chaired by the IMF, the World Bank and the G20 presidency, reported in April that the restructurings begun in 2021 and 2022 are “now largely completed.” Its own tables tell a slower story. Zambia reached a staff-level agreement with the IMF in December 2021 and closed its bond exchange in May 2024. As of the roundtable’s April report, it had signed 6 of the 14 bilateral agreements needed to put its deal with official creditors into effect, more than four years after that first IMF agreement. Ghana had signed 9 of 23, Ethiopia 2 of 14. Ethiopia stopped paying coupons on its US$1 billion eurobond in December 2023. Its official creditors rejected a January 2026 deal with bondholders because the bondholders would have given up too little. A revised agreement reached on June 29 cleared that hurdle only in a letter dated July 31 and made public in August, in which the creditor committee judged it compliant “at this stage” and warned that it set no general precedent. According to the finance ministry’s latest statement, from August, the government still had to finalize documentation before launching the exchange.
The institutions are not standing still, and that should be acknowledged. The roundtable’s April report encourages debtors to publish, as soon as they reach agreement in principle with official creditors, the three benchmarks against which private creditors’ concessions will be judged. It says that, absent specific circumstances, debtors “could expect” bilateral agreements to be finalized within 12 months of a memorandum of understanding. It also endorses an industry guide for restructuring bank loans and a manual on liability management operations with credit enhancements, and it has put coordination for countries not eligible for the Common Framework on its work program. In September, following an IMF board review, the World Bank’s board approved a revamped debt sustainability framework for low-income countries. It adds a new module for domestic debt risks, including those arising from the links between sovereigns and banks. These are real improvements. But they are mostly voluntary, and the new framework will not be operational until the second half of 2027, after much of the low-income bond wall has come due. And the Common Framework is still built around external claims led by official bilateral creditors, while the fastest-growing part of these countries’ debt is domestic.
The research therefore supports a narrower version of the original argument. International institutions do need to move faster, but the most useful changes are less about redesigning relief after default than about preventing avoidable ones. That means firmer deadlines for bilateral creditors to sign what they have already agreed, and scaled-up liquidity support under the IMF–World Bank “three-pillar approach” for solvent countries facing a bunching of maturities. It also means using the new domestic-debt analysis to decide when a domestic restructuring would do more harm to local banks than it saves the budget. For Brazil, and for other large economies that borrow mainly at home in their own currency, the lesson runs the other way. Their slow fuse can ultimately be defused only at home, through fiscal credibility that lets the central bank cut rates and lets the Treasury go back to selling longer, fixed-rate debt.
Some of what comes next is likely. Brazil’s debt ratio will probably keep rising through 2027 under both IMF and market projections, and floating-rate debt sits near the top of the Treasury’s target range. It is possible that a credible fiscal anchor after the October elections would narrow risk premiums quickly, given how directly the Selic feeds into the debt stock. Disappointment could just as quickly push the other way. The path of energy prices is uncertain, as is whether frontier borrowers that postponed issuance in the spring find open markets before their 2026 and 2027 maturities. So is whether Ethiopia completes its bond exchange soon. The IMF and World Bank annual meetings in October give shareholders a chance to turn the roundtable’s recommendations into commitments with dates attached. BrasÃlia’s next government faces a harder test with no external debt-relief mechanism available: it must persuade its own creditors that the interest bill will stop compounding faster than the economy grows.
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