After a decade or more in which they have been obsessed with their own problems, countries in the wealthy west are starting to wake up to the risk of a looming debt crisis in poorer parts of the world.
This week’s gathering of the International Monetary Fund and World Bank in Washington has been marked by a discussion about what to do about countries that are in debt distress or on the brink of it.
The good news is that debt has climbed back up the policy agenda and is seen as a problem that needs sorting. The managing director of the IMF, Kristalina Georgieva, has been particularly keen to stress the need to assist struggling countries while there is still time.
“I would like to make a double plea on their behalf: help them handle the burden of debt, which was made so much harder by the shocks of the past years; and secondly, help ensure that the IMF continues to be in a position to support them in the years ahead,” she said in a speech before this week’s gathering.
The bad news is that Georgieva’s plea is yet to be heeded. Wealthy countries are still primarily concerned with their own problems. The geopolitical rivalry between the US and China is also not helping. Creditor countries may be waking up to the idea that there is a problem with debt but they are a long way from finding a solution. Talk is not being matched by action.
“Nothing will happen this week,” says Matthew Martin, the director of the campaign group Debt Relief International. “But while nothing happens the crisis will get worse and worse.”
Achim Steiner, the administrator of the UN Development Programme, says there are more than 50 countries on his radar, which could “be in debt default very quickly”.
Comparisons are already being drawn with the systemic crises that eventually resulted in the big debt relief programmes in the 1990s and mid-2000s. Steiner thinks those comparisons are valid, and that the ambitious 2030 UN development goals have no chance of being met unless there is urgent action.
The extent of lending by the private sector has made attempts to restructure or write off debt more complex than it was in the past. At the time of the heavily indebted poor country (HIPC) initiative, the creditors tended to be either individual governments or multilateral organisations such as the World Bank.
But since the global financial crisis many countries – especially middle-income ones – have borrowed heavily in the financial markets, taking advantage of ultra-low interest to fund domestic projects.
After the blow of the Covid-19 pandemic, low- and middle-income countries have since been hit by two further unwelcome shocks: the war in Ukraine, which sent the cost of food and fuel soaring, and the sharp increase in interest rates by the central banks in large western economies. The upshot is that servicing debts has become much more expensive, with many countries now frozen out of financial markets altogether.
At the start of the pandemic, there were initiatives to help the most vulnerable countries. Debt repayments were temporarily suspended, the IMF announced a $650bn (£520bn) allocation of special drawing rights (SDR) – effectively a global form of quantitative easing – and a common framework to provide speedier debt relief was set up.
Debt payments have resumed, while most of the SDR allocation went to wealthy countries that had no need of it. Meanwhile, the common framework has failed to live up to its promise, with only one country – Chad – so far receiving any debt relief.
China, which has emerged in the past decade as a significant bilateral creditor, has been reluctant to offer debt relief unless the World Bank and the IMF are prepared to take a financial hit themselves. Beijing also says there is no point in providing relief if the money saved goes to pay off private creditors. They want private sectors to be fully engaged in the process, something that has not been the case so far.
Winnie Byanyima, the executive director of theJoint UN Programme on HIV/Aids, says: “The G20 debt suspension and common framework have failed to deliver the kind of debt relief developing countries need to be able to withstand and recover from the multiple crises the world faces today.
“We need a new approach that provides immediate relief to countries in need, and that establishes a permanent mechanism for addressing sovereign debt distress that is accessible to all countries.”
Steiner says the issue is not financial but political. “The US mobilised $400bn to guarantee the deposits of Silicon Valley Bank. That’s more than the developing world received in three years. The Swiss government took less than 48 hours to find CHF 100bn to underwrite the rescue of one of its banks.”
The lesson from the recent banking crises is clear, he notes. Wealthy countries can act quickly enough when they want to.
