The next global economic emergency? Growing Debt in the Developing World | Larry Elliott
A global pandemic. Rising inflation. The threat posed by climate change. Global policymakers have plenty to deal with without adding a developing country debt crisis to their list of problems.
It is a real possibility. Both the World Bank and the International Monetary Fund have used their annual meetings to highlight the pressure on the poorest countries and the need for urgent collective action. They are right to be worried because debt is at record highs, defenses against a crisis are weak and time is running out.
The problems only arose gradually. In the first phase, developing countries borrowed money, partly from multilateral institutions, others from individual countries and partly from the private sector.
At the time, this seemed relatively safe as the global economy was growing and demand for commodities produced by low-income countries was high. The assumption was that the interest payments on the debt would be covered by future export earnings. Then, commodity prices collapsed in the mid-2010s and the Bank and IMF began to voice their concerns.
The pandemic ushered in a second phase because, while no part of the world has been spared by Covid-19, poor countries have been hit harder than developed countries. Poor countries were more fragile at the start of the pandemic, had fewer opportunities to stimulate their economies and are on the wrong side of the global vaccine divide.
David Malpass, the President of the World Bank, said last week that of the 74 countries eligible for concessional loans and grants through his institution International Development Association arms, more than half were “in external debt or at high risk of becoming so”.
When the US Federal Reserve begins to raise interest rates, the third phase will begin. Many poor countries have borrowed in US dollars, and the cost of servicing these loans – already high – will rise further as the Fed tightens its policy. This will be the point of maximum danger.
Malpass knows it. Last week, he said: âA comprehensive approach, including debt reduction, faster restructuring and more transparency is needed to help countries assess and manage their external debt risks and work for them. sustainable debt levels and conditions.
As it stands, the chances of getting a âbig pictureâ seem low. In April 2020, the G20 group of major developed and emerging market economies agreed to a Debt Service Suspension Initiative (DSSI) designed to ease immediate financial pressures on the poorest countries, but it did not. never been more than a temporary solution and had only limited success.
According to the Jubilee Debt Campaign, the 46 low-income countries that asked for aid suspended $ 10.3 billion (Â£ 7.5 billion) in debt and canceled $ 300 million, but still have paid off $ 36.4 billion in debts to their creditors.
The DSSI expires at the end of the year and is replaced by the Common Framework for Debt Treatment, an initiative meant to include all creditors – public and private – and propose debt cancellation rather than suspension.
Three countries in sub-Saharan Africa – Chad, Ethiopia and Zambia – have requested the cancellation of their debt under the Common Framework, but without success. The difficulty lies in the fact that debtors applying for the scheme must get all creditors to agree to the same agreement. So far, the private sector has refused to do it and there is little the G20, the World Bank or the IMF can do.
The communicated released at the end of last week’s G20 meeting said he welcomed âprogressâ on the common framework, but like Tim Jones, head of policy at the Jubilee Debt Campaign, noted he It was difficult to see what this progress amounted to given that the amount of debt cancellation for Chad, Ethiopia and Zambia has so far been zero.
âThe G20 is asleep at the wheel as the debt crisis escalates in low-income countries,â Jones said. âThe current rise in global interest rates will worsen the crisis, preventing countries from recovering from the pandemic. There is an urgent need for the G20 to force private creditors to participate in debt restructuring.
The question is how to proceed in the absence of a sovereign debt restructuring mechanism (SDRM) that would allow countries to file for bankruptcy. Over the years, proponents of an SDRM have noted that corporations have a legal way to get rid of unsustainable debt, but nation states do not. Malpass was the last to report it last week.
Realistically there will be no progress on an SDRM until it is backed by the United States and although it is possible that Joe Biden will support the idea that it is reasonable to assume that a bankruptcy plan is not at the top of his to-do list. .
In the meantime, Jones says there are ways to pressure private sector creditors to play the game, such as through legislative changes in the United States or the United Kingdom, the two countries where Private sector creditors tend to go to court to have their debts paid off.
One possible option would be collective action clauses that would bind all creditors to a restructuring deal in the event that a large majority – say 66% – agreed. In these circumstances, individual creditors could not claim a better deal.
Another would be to update the 2010 UK legislation which prevented vulture funds from suing for better terms than they would have received if they had agreed to participate in the Heavily Indebted Poor Countries Initiative (an earlier attempt at comprehensive debt relief).
Prevention is better than cure and the threat of a debt crisis must be recognized before it is too late. Tick ââtock, tick tock.