The next global economic emergency? Growing debt in the developing world | Larry Elliot

A global pandemic. Rising inflation. The threat posed by climate change. Global policymakers have plenty to do without a developing country debt crisis adding to their list of problems.

It is a real possibility. 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 worry because the debt is at recording levelsdefenses against a crisis are insufficient and time is running out.

The problems only appeared gradually. In the first phase, developing countries borrowed money, partly from multilateral institutions, partly from individual countries and partly from the private sector.

At the time, it seemed relatively safe because the global economy was growing and demand for raw materials produced by low-income countries was strong. The assumption was that interest payments on the debt would be covered by future export earnings. Then commodity prices crashed in the mid-2010s and the Bank and IMF began to voice of concern.

The pandemic has ushered in a second phase because, although 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 less room 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 soft loans and grants through his institution International Development Association arms, more than half were “externally indebted or at high risk”.

When the United States 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 those loans – already high – will rise further as the Fed tightens policy. This will be the maximum danger point.

Malpass knows it. Last week he said: “A comprehensive approach, including debt reduction, faster restructuring and more transparency is needed to help countries assess and manage their external debt risks and work towards sustainable debt levels and conditions.

As things stand, the chances of getting a “comprehensive approach” seem slim. In April 2020, the G20 A group of major developed and emerging economies have agreed to a Debt Service Suspension Initiative (DSSI) designed to ease immediate financial pressures on poorer countries, but it has only ever been a stopgap solution. and had only limited success.

The Jubilee Debt Campaign says the 46 low-income countries that have asked for help have seen $10.3bn (£7.5bn) in debt suspended and $300m canceled, but have yet to repay $36.4 billion in debt to creditors.

The DSSI expires at the end of the year and is replaced by the Common Debt Treatment Framework, an initiative meant to include all creditors – public and private – and offer debt cancellation rather than suspension.

Three countries in sub-Saharan Africa – Chad, Ethiopia and Zambia – have applied for debt cancellation under the Common Framework, but without success. The difficulty is that debtors who join the scheme must get all creditors to agree to the same agreement. So far the private sector has refused to do this and there are not many G20s, world Bank or the IMF can do about it.

the communicated published at the end of last week’s G20 meeting said he welcomed “progress” on the common framework, but as Jubilee Debt Campaign policy manager Tim Jones noted that he It was hard to see what this progress amounted to given that the amount of debt cancellation for Chad, Ethiopia and Zambia so far is zero.

“The G20 is asleep at the wheel as the debt crisis escalates in low-income countries,” Jones said. “The current rise in global interest rates will deepen the crisis, preventing countries from recovering from the pandemic. The G20 must urgently compel private creditors to participate in debt restructuring.

The question is what to do in the absence of a Sovereign Debt Restructuring Mechanism (SDRM) that would allow countries to declare themselves bankrupt. 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 while it’s possible Joe Biden could throw his full weight behind the idea, he’s reasonable to assume that a bankruptcy plan isn’t high on his to-do list. .

In the meantime, Jones says there are ways to pressure private sector creditors to play along, for example through legislative changes in the US or the UK, the two countries where private sector creditors tend to sue in court to get their debts repaid.

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One possible option would be collective action clauses which would bind all creditors to a restructuring agreement in the event that a significant majority – say 66% – agrees. Under these circumstances, individual creditors would be unable to wait for a better deal.

Another would be to update the UK legislation 2010 this prevented vulture funds from suing for better terms than they would have received had they agreed to participate in the Heavily Indebted Poor Countries Initiative (an earlier attempt at global debt relief ).

Prevention is better than cure and the threat of a debt crisis must be recognized before it is too late. Tick ​​tock, tick tock.

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