The Sovereign Debt Avalanche – Which Countries Will Default First in the New Oil Crisis?

During the third week of March 2026, something began to move in the bond trading rooms of New York and London that the general public had not yet noticed. The premium that investors demand over safe-haven rates to hold a specific government’s debt, known as sovereign bond spreads for developing nations, started to move at an unusually rapid pace. In about two weeks, Ukraine’s borrowing costs increased by 135 basis points.

The spreads in Sri Lanka grew. Pakistan has relocated. At the same time that their import bills, which were denominated in a commodity that had just increased by 60%, were growing, nations that had been carefully managing IMF agreements and cautious fiscal calendars suddenly found themselves paying more to borrow. The impact of the US-Israeli strikes on Iran extended well beyond the Middle East. They had landed particularly forcefully on the balance sheets of governments with few resources to deal with the crisis’ aftermath and no part in its creation.

In an opinion piece that was uncomfortable for anyone keeping an eye on the state of the world economy, Ruchir Sharma, the chairman of Rockefeller International, put the context bluntly. He contended that the world has never experienced an energy shock with so much debt. Last year, the total amount of global debt reached a record $348 trillion, more than three times the world’s GDP, and it increased at the quickest rate since the pandemic. Before the oil shocks of the 1970s altered fiscal behavior throughout the developed world, G7 government debt averaged about 20% of GDP; today, it is over 100%. This historical parallel is significant because the energy crises of the 1970s marked a turning point in government policy, as the cost of subsidizing energy prices for populations unable to absorb market rates became politically inevitable. Now that there is significantly less financial capacity to handle it, the same strain is increasing.

The nations that are most in danger are not the ones whose military tactics or Hormuz stories make headlines. From Nairobi to Kathmandu to Accra, treasury ministries and finance offices are experiencing a different kind of emergency. Twelve nations were identified by researchers at Boston University’s Global Development Policy Center as being in what amounts to a double stress test in 2026: rising bond spreads, which means their cost of new borrowing is rising, and above-median external debt payments that are due this year, which means they have to find substantial sums at the precise moment when the market is charging more to lend.

Cote d’Ivoire, the Dominican Republic, Egypt, El Salvador, Ghana, Honduras, Jordan, Kenya, Mongolia, Paraguay, Rwanda, and Uzbekistan are among those on the list. There is a third layer for three of these: Egypt, Mongolia, and Uzbekistan. Each manages significant fuel subsidy programs, allocating 28.3, 28.0, and 11.9 percent of government expenditures, respectively, to maintaining artificially low energy prices for domestic consumers. In addition to increasing their import expenses, rising oil prices also inevitably increase their subsidy burden at precisely the wrong moment.

Perhaps because it appears different from the outside than it feels from the inside, the fuel subsidy issue receives little attention in Western financial commentary on sovereign debt risk. When a government subsidizes fuel, it usually does so because the political and social cost of not doing so—that is, transferring global market prices directly to low-income populations in economies with weak social safety nets—is thought to be higher than the financial cost of keeping the subsidy in place. For decades, Egypt has managed this calculation, with varying degrees of success. As a requirement for program support, the IMF has consistently pushed for subsidy reform. Eliminating subsidies during an active fuel price shock, when the populations most vulnerable to price increases are also most likely to react with public unrest, is not a theoretical problem in terms of political economy. The issue is one of governance. Additionally, it complicates the fiscal math in ways that bond spreads only partially capture.

It’s worth pausing to consider where some of these nations were prior to the current crisis. After a default that its government had insisted would not occur until it did, Ghana restructured its debt in 2023. In 2022, fuel shortages caused power outages and ultimately the storming of the presidential residence during Sri Lanka’s truly destabilizing economic crisis. Kenya has been simultaneously handling challenging debt talks with multilateral organizations and Chinese creditors. These economies, which already bear the burden of past crises, are being hit by a new one that they did not cause and have little capacity to fend off. They are not blank slates absorbing a first shock.

There is additional complexity due to the creditor landscape. China, the Paris Club of Western government creditors, multilateral organizations like the IMF and World Bank, and private bondholders are the four main recipients of major 2026 debt obligations for the 12 highest-risk nations. These creditors must move in roughly the same direction at roughly the same time in order to receive coordinated relief, and historically, this coordination has been difficult, slow, and often insufficient to stop the defaults it was supposed to prevent. Since its establishment in 2020, the G20 Common Framework for debt restructuring has yielded only modest results over a number of years. Bond spreads moved quickly in the three weeks following the Iran strikes, indicating that the market is also skeptical that the institutional response will be prompt enough this time.

In addition to the more evident emerging market cases, Sharma’s identification of the United States and the United Kingdom as among the most vulnerable developed nations merits consideration. Despite five years of efforts, the Federal Reserve has failed to bring US inflation back to its target of 2%. Yields have increased due to weak demand at recent Treasury auctions, which reflects investor concern about deficit expansion in light of the oil shock.

A government that must spend more on economic assistance or energy subsidies at a time when its bond market is already exhibiting symptoms of congestion is in a truly constrained position; this isn’t the same as Kenya or Ghana, but it is constrained in ways that weren’t present in earlier crises. Governments have spent a significant amount of the fiscal breathing room they used to launch extensive stabilization efforts in 2008 and 2020. There’s a sense that something has changed in the underlying architecture of global fiscal resilience as the bond market processes all of this in real time, and the oil shock has come at the perfect time to test how much of that change was temporary and how much is permanent.