Poor countries face an economic storm and defaults loom

WASHINGTON – Developing countries face a catastrophic debt crisis in the coming months as rapid inflation, slowing growth, rising interest rates and a stronger dollar combine in a Perfect storm which could unleash a wave of insolvencies and cause economic woes for the world’s most vulnerable people.

Poor countries owe, according to some estimates, up to 200,000 million dollars to rich nations, multilateral development banks and private creditors.

Rising interest rates have increased the value of the dollar, making it more difficult for foreign borrowers with US-denominated debt to repay their loans.

Defaulting on a huge swath of loans would make borrowing costs for vulnerable nations even higher and could lead to financial crises when nearly 100 million people have already been pushed into poverty this year by the combined effects of the Russia’s pandemic, inflation and war in Ukraine.

The danger represents another headwind for a global economy that is spitting towards recession.

In recent weeks, leaders of the world’s advanced economies have privately discussed how to avoid financial crises in emerging markets such as Zambia, Sri Lanka and Ghanabut they struggled to come up with a plan to speed up debt relief as they grappled with their own financial woes.

As rich countries brace for a global recession and try to cope with high food and energy prices, investment flows to developing countries have slowed and big creditors, especially Chinathey have been slow to restructure loans.

Massive defaults in low-income countries are unlikely to trigger a global financial crisis given the relatively small size of their economies.

But the potential is prompting policymakers to rethink debt sustainability at a time of rising interest rates and increasingly opaque loan transactions.

In part, this is because defaults can make it more difficult for countries like the United States to export goods to indebted nations, further slowing the global economy and potentially causing widespread hunger and civil unrest.

As Sri Lanka neared default this year, its central bank was forced to strike a barter deal to pay for Iranian oil in tealeaf.

“Finding ways to reduce debt is important for these countries to emerge at the end of the tunnel,” said David Malpass, president of the World Bank, in an interview at the Group of 20 summit in Bali last month (Indonesia).

“This burden on developing countries is heavy, and if it continues like this, they will continue to get worse, which then impact in advanced economies in terms of increased migratory flows and loss of markets”.

The urgency comes from coronavirus lockdowns in China and Russia’s war in Ukraine, which have slowed global production and sent food and energy prices soaring.

The Federal Reserve quickly raised interest rates in the United States, adding to the dollar’s strength and making it more expensive for developing countries to import staples for populations already grappling with rising prices.

Global economists and financial institutions, such as the World Bank and International Monetary Fund, have sounded the alarm about the seriousness of the crisis.

The World Bank predicts this year that around a dozen Countries could default within the next year and the IMF estimated that 60% of low-income developing countries were in debt distress or at high risk of being.

Since then, developing countries’ finances have continued to deteriorate.

The Council on Foreign Relations said last week that 12 countries now have their highest default score, up from three 18 months ago.

Brad Setser, a council member, reckons it’s necessary restructure $200,000 million of sovereign debt in emerging markets.

“It’s certainly a systemic problem for the affected countries,” Setser said.

“Because an unusually large number of countries borrowed from the market and from China between 2012 and 2020, there are an unusually large number of countries that are in default or at risk of default.”

Debt restructuring may include giving grace periods for repayment, lowering interest rates, and forgiving some of the principal amount owed.

Traditionally, the United States has led large debt relief initiatives, such as the Brady Bond” for Latin America in the 90s.

However, the emergence of commercial creditors lending at high interest rates and prolific borrowing by China, which has been reluctant to take losses, have complicated international debt relief efforts.

Fitch, the credit rating firm, warned in a report last month that “more defaults are likely” in emerging markets next year and complained that so-called Common framework that the Group of 20 set up in 2020 to facilitate debt restructuring “is not proving effective in resolving crises quickly”.

Since the framework has been established, only Zambia, Chad and Ethiopia They called for debt relief.

It has been a very complicated process, involving creditors’ committees, the International Monetary Fund and the World Bank, who have to negotiate and agree on how to restructure the loans countries owe.

After two years, Zambia is finally on the verge of restructuring its debts with Chinese state banks, and last month Chad reached an agreement with private creditors, including Glencore, to restructure its debt.

Bruno LeMaire, France’s finance minister, said progress with Zambia and Chad was a positive step, but there was still much work to be done with other countries.

“Now we have to accelerate,” Le Maire said on the sidelines of the G20 summit.

China, which has become one of the world’s largest creditors, remains an obstacle to relief efforts.

Development experts accused it of straining “debt trap” to developing countries with its loan program of more than $500 billion, which has been described as predator.

“It’s really about China not being willing to admit that its loans have been unsustainable and dragging its feet to make deals,” said Mark Sobel, a former Treasury Department official and US chairman of the Monetary Institutions Forum.

United States of America he has regularly urged China to be more accommodative and complained that Chinese loans are difficult to restructure due to opaque contract terms.

He described China’s lending practices as “unconventional”.

“China is not the only lender holding back from quickly and effectively enforcing the typical playbook,” said Treasury Secretary Brent Neiman. Janet Yellenin a speech delivered in Washington in September.

“But in the international credit landscape, China’s non-participation in coordinated debt relief is the most common and the most consequential.”

China accused Western trade creditors and multilateral institutions of not doing enough to restructure debts and denied predatory lending.

“They are not ‘debt traps’, but monuments of cooperation”Wang Yi, Chinese Foreign Minister, said this year.

China’s economy itself is slowing due to its strict “zero COVID” policy, which has included mass testing, quarantines and lockdowns of its population.

A domestic housing crisis has also made it difficult for China to accept losses on loans to other countries.

IMF officials will travel to Beijing next week for a “1+6” roundtable with the leaders of major international economic institutions.

During these meetings, they will help China better understand the debt restructuring process through the common framework.

Ceyla Pazarbasioglu, director of the IMF’s strategy, policy and auditing department, acknowledged that agreement on the terms of the debt relief could take time, but said she would communicate the urgency to Chinese officials.

“The problem we have is that we don’t have time right now because countries are very fragile when it comes to dealing with debt vulnerability,” Pazarbasioglu, who is traveling to China, told reporters last week.

At the annual meetings of the IMF and the World Bank in Washington in October, politicians said the pace of debt restructuring was too slow and called for coordinated action between lenders and borrowers to find solutions before it was too late.

During a roundtable discussion on debt restructuring, Gita Gopinath, first deputy managing director of the IMF, said countries and creditors should avoid the type of Hopeful thinking which led to defaults.

“There is a big tendency to gamble on the bailout,” Gopinath said.

“There is a lot of tendency for creditors to wait for the redemption, and then nothing is resolved.”

However, when the Group of 20 meeting concluded in November, little progress appeared to have been made.

In a joint statement, leaders expressed concern about the “deteriorating debt situation” in some vulnerable middle-income countries. However, they have offered few concrete solutions.

“We reaffirm the importance of the joint efforts of all actors, including private creditors, to continue working to improve debt transparency,” the statement said.

The statement included a footnote stating that “one member has differing views on debt issues”.

That country, according to people familiar with the matter, was China.

In the interview, Malpass said that China was willing to discuss debt relief, but “the devil is in the details” when it comes to restructuring loans to reduce the debt burden.

The World Bank president has predicted that developing countries’ fiscal woes are unlikely to escalate into a global debt crisis like the one that unfolded in the 1980s, when many Latin American countries were unable to pay the service of its external debt.

However, he suggested that there is a moral imperative to do more to help poor countries and populations who have fallen into poverty during the pandemic.

“There will be continued setbacks in development in terms of poverty, in terms of hunger and malnutrition, which are already on the rise,” Malpass said.

“And it comes at a time when countries need more resources, not less.”

c.2022 The New York Times Society