Abstract for: Why does Ukraine’s sovereign debt keep rising? Path dependent dynamics under external official financing

Ukraine’s sovereign debt is now at really high levels, the highest ever. This trend is mainly driven by the ongoing war. To understand why this upward trend keeps going, we need to look at the internal, path-dependent mechanisms that shape debt dynamics over time. These processes tend to reinforce themselves, making it harder to reverse the pattern, especially in a situation marked by conflict and external dependency. Ukraine’s sovereign debt trend is at the highest ever level, mainly driven by the ongoing war. Most of these come from loans from the EU, G7 countries, and international financial institutions. To understand why this upward trend keeps going, we need to look at the internal, path-dependent mechanisms that shape debt dynamics over time. These processes tend to reinforce themselves, making it harder to reverse the pattern. We develop dynamic hypothesis to explain why Ukraine's debt keeps rising, with the focus on reinforcing feedback loops between fiscal deficits, concessional external financing, perceptions of sovereign risk, and shrinking policy options. Our model shows the causal links behind debt growth, dependence on external funding, and the risk of getting stuck in a cycle. The conceptual framework illustrates mechanisms that keep pushing debt levels higher, even with temporary relief measures. The model shows how past decisions can limit Ukraine’s ability to manage its finances, especially when changes are needed around 2027-2028. By identifying the main factors that keep debt levels high, the study helps to analyze different scenarios. It looks at what might happen if external aid changes, interest rates grow differently, or restructuring strategies are used. These findings can help policymakers make better decisions when dealing with high debt. AI tools were used to assist with text editing and structuring of the abstract