‘Time is running out’: global debt crisis reaches crisis point | Mondial economy

Kristalina Georgieva, Managing Director of the International Monetary Fund knows this. David Malpass, the president of the World Bank knows it too. A growing number of countries are struggling to pay their debts, and the tipping point is coming fast.

The impending debt crisis was a slow affair, more than a decade in the making. It’s not the number one issue being discussed at the annual meetings of the World Bank and IMF in Washington this week, although if rich countries had fewer problems themselves, it would be.

The UN has identified 54 developing economies with serious debt problems. While they represent just over 3% of the global economy, they represent 18% of the world’s population and more than 50% of people living in extreme poverty.

Some countries spend more on debt interest payments than on health, education and social protection combined, which hampers the fight against poverty.

The UN aims to reduce extreme poverty to 3% of the world’s population by 2030, but Indermit Gill, the World Bank’s chief economist, says that given current trends, the target will be missed. “We are completely off the mark. Poverty reduction has stopped.

Debt problems are not limited to low-income countries. Sri Lanka’s debt default earlier this year showed that many middle-income countries are also struggling to sustain loan repayments made when interest rates and inflation were much lower.

Already, around 60% of low-income countries and around 25% of emerging markets are either in debt distress or at high risk. Recent developments in rich countries – especially the United States – are making life much more difficult.

Since the first months of this year, the Federal Reserve has been aggressively raising US interest rates to fight inflation. The dollar soared in global currency markets. Since 90% of emerging market debt is denominated in dollars, a stronger US currency makes repayments extremely expensive. Borrowing costs for heavily indebted countries have skyrocketed.

Tim Jones, from campaign group Debt Justice, said: “Two-thirds of low- and middle-income countries now have bond yields above 10% and can no longer borrow from the private sector. If countries can’t refinance their bonds, you have a crisis.

Alarm bells started ringing when the Covid-19 pandemic erupted in early 2020. The G20 group of major developed and emerging market economies agreed to provide emergency aid through a suspension time-limited debt payments and also introduced a new regime – the Common Framework – to restructure the debts of countries in serious difficulty on a case-by-case basis.

But over the past two and a half years the framework has yet to be put in place as the problem of over-indebtedness has become much more acute due to high inflation following the end of the Covid lockdowns and the war in Ukraine.

To complicate matters, much of the debt, especially that of middle-income countries, is owed to China and private sector creditors. Getting Beijing and investment firms such as BlackRock to accept debt relief has proven to be a slow and difficult process.

Matthew Martin, of the campaign group Debt Relief International, said the idea that debt relief was simply thwarted by the intransigence of China and private sector creditors was not true. “For many poor countries, it’s the multilateral development banks.”

Only three countries have expressed interest in receiving assistance under the Common Framework and only one – Zambia – is close to concluding an agreement. Martin says he’s not surprised by this.

“Going through the common framework, as Zambia is doing, is a very costly way of doing things as it has meant two years of lost growth and being shut out of financial markets.

“We don’t need to find new ways to deal with the debt crisis. Three things have worked in the past and will work again: political pressure and moral suasion; regulation and tax relief. for creditors who cancel their debts.

Gill says the World Bank takes debt very seriously, bracketing it with climate change as the biggest challenge facing the institution.

He admits the common framework has so far fallen short and says something more ambitious might be needed. There is a precedent, he suggests, in the Heavily Indebted Poor Countries (HIPC) Initiative, launched by the World Bank and IMF in 1996 with the aim of ensuring that no country has a burden of debt that he could not handle.

“Let’s get another round of structured debt relief, because that’s what the HIPC initiative was. The common framework is case by case, and case by case means the weak lose. Poor countries that can’t negotiate for themselves get a bad deal. HIPC meant that everyone received the same deal.

“Poverty used to be seen as a global evil, just like climate change is now. Taxpayers in rich countries have said they are willing to give up some of the money owed to them in exchange for debtor countries that would largely reduce poverty.

In the past, systematic debt relief happened when creditors recognized that there was a serious problem and there was the will to do something about it. Debt activists say the first condition has been met but not the second. In the meantime, as IMF economic adviser Pierre-Olivier Gourinchas noted this week: “Time may soon run out.

Robert P. Matthews