Debt disaster with no escape

The IMF-World Bank semi-annual meeting starts this week.  Earlier the IMF kicked off the show with a warning that the poor countries of the world are heading for a catastrophe from the pandemic slump, leading to defaults on the debts that their governments and companies owe to investors and banks in the ‘global north’.

According to the IMF, about half of Low Income Economies (LIEs) are now in danger of debt default.  ‘Emerging market’ debt to GDP has increased from 40% to 60% in this crisis.

And there is little room to boost government spending to alleviate the hit. The ‘developing’ countries are in a much weaker position compared with the global financial crisis of 2008-09. In 2007, 40 emerging market and middle-income countries had a combined central government fiscal surplus equal to 0.3 per cent of gross domestic product, according to the IMF. Last year, they posted a fiscal deficit of 4.9 per cent of GDP.  The government deficit of ‘EMs’ in Asia went from 0.7 per cent of GDP in 2007 to 5.8 per cent in 2019; in Latin America, it rose from 1.2 per cent of GDP to 4.9 per cent; and European EMs went from a surplus of 1.9 per cent of GDP to a deficit of 1 per cent.

For example, Brazil is now running a consolidated government deficit of 15% of GDP.  India’s is 13%.  Both countries will see their sovereign debt levels rise towards 90% of GDP by the end of next year and approach 100% of GDP in 2022.

New World Bank chief economist Carmen Reinhart warned that the global south faces “an unprecedented wave of debt crises and restructurings”.  Reinhart said: “in terms of the coverage, of which countries will be engulfed, we are at levels not seen even in the 1930s.”  Debts owed by non-financial companies in the 30 largest emerging markets rose to 96 per cent of gross domestic product in the first quarter of this year, more than the amount of corporate debt in advanced economies, at 94 per cent of GDP, according to the IIF.

Over the next two years the top 30 emerging economies face the highest level ever of maturing debt, both private and public.

And so these poor countries will be forced to raise even more debt to deal with the pandemic slump and meet repayments on existing debt.  Nevertheless, Reinhart argued that “while the disease is raging, what else are you going to do? First you worry about fighting the war, then you figure out how to pay for it.”

This was ironic coming from somebody who is best known for her work with fellow Harvard economist Kenneth Rogoff on the economic damage inflicted by high debt levels throughout history.  In their famous (infamous?) book, This time is different, they argued that high public debt levels were unsustainable and governments would have to apply ‘fiscal austerity’ to reduce them or face a banking and debt collapse. 

Worse, much of the debt is denominated in US dollars and as that hegemonic currency increased in value as a ‘safe haven’, the burden of repayment will mount for the dominated economies of the ‘south’. The level of EM corporate ‘hard currency’ debt is significantly higher now than in 2008. According to the IMF’s October 2019 Financial Stability Report, the median external debt of emerging market and middle-income countries increased from 100 per cent of GDP in 2008 to 160 per cent of GDP in 2019.

Capitalist investors and banks are now no longer investing in the stocks and bonds of the ‘global south’ – apart from China.  So the flow of private capital has dried up to fund existing debt.

As a result, the currencies of the major emerging markets have dived relative to the dollar and other ‘hard’ currencies, making it even more difficult to repay debts.

This impending debt crisis only compounds the impact of the pandemic slump on the global south.  In its report for the semi-annual meeting, the World Bank reckons that the pandemic will push between 88m and 115m people into extreme poverty this year, which the bank defines as living on less than $1.90 a day (a pathetically low threshold anyway).

More than 80 per cent of those who will fall into extreme poverty this year are in ‘middle-income’ countries, with south Asia the worst-hit region, followed by sub-Saharan Africa. “We are likely to see people who previously escaped poverty falling back into it, as well as people who have never been poor falling into poverty for the first time,” said Carolina Sánchez-Páramo, director of the bank’s poverty and equity division. “Even under the optimistic assumption that, after 2021, growth returns to its historical rates . . . the pandemic’s impoverishing effects will be vast,” the World Bank said.

The global economy is expected to contract by between 5 and 8 per cent this year on a per-capita basis, and that would set poverty levels back to their 2017 levels, undoing three years of progress in improving living standards, the World Bank estimated.

Progress in reducing poverty had been slowing before the pandemic, according to the report. About 52m people worldwide rose out of poverty between 2015 and 2017 but the rate of poverty reduction had slowed to less than half a percentage point a year during that period, after reductions of about 1 per cent a year between 1990 and 2015.

What is also clear from the report is that all the reduction in poverty rates since 1990 have been in Asia, in particular East Asia, and in particular China. Strip China out and there has been little or no improvement in absolute poverty in 30 years.

Nearly 7 per cent of the world’s population will live on less than $1.90 a day by 2030, the report said, compared with a target of less than 3 per cent under the UN’s Sustainable Development Goals.

In an attempt to head off the impending debt defaults, a debt service moratorium was approved by the G20 and runs until the end of this year. The IMF has also provided about $31bn of emergency financing to 76 countries, including 47 of the poorest countries under the Catastrophe Containment and Relief Trust. Most of these countries had high economic dependence on single commodity exports or tourism and suffered a classic external financing seizure and economic collapse when Covid-19 struck.

But mostly it’s all talk; with speeches like those of IMF chief Georgieva and Reinhart at the World bank.  As Oxfam says in a devastating new report on inequality and the lack of public services and workers’ rights, “emergency programmes have focused on closing the huge budget and balance of payments financing gaps produced by coronavirus-related revenue collapses, and on allowing more space for health and limited social protection spending to confront the crisis.” And the “IMF’s global, regional and national reports are already warning of the need for ‘fiscal consolidation’ i.e. austerity, to reduce debt burdens once the pandemic has been contained.”

Virtually all the national emergency loan documents emphasize the need for governments to make anti-corona virus spending temporary and to take fiscal adjustment measures to reduce deficits after the pandemic. For example, in June 2020, the IMF agreed a 12-month, $5.2bn loan programme with Egypt, which detailed a FY2020/21 primary budget surplus target of 0.5% to allow for spending related to the coronavirus pandemic, but demanded that it be restored to the pre-crisis primary surplus of 2% in FY 2021/22. The IMF has also been linked to large cuts in health spending, which have left countries ill-prepared for the crisis.

The World Bank has pledged $160bn in emergency funding over the next 15 months, and has advocated debt relief by other creditors, but has so far refused to cancel any debt owed to it, despite low-income countries repaying $3.5bn to the World Bank in 2020. Oxfam’s analysis shows that only 8 of 71 World Bank COVID-19 health projects included any measures to reduce financial barriers to accessing health services, even though a number of these projects acknowledge high out-of-pocket health expenditure as a major issue. Such expenditures bankrupt millions of people each year and exclude them from treatment.

The only effective way to avoid debt defaults is to cancel the debts of the poor countries owed to the banks and multinationals.  But that is the one policy that is no going to happen.

The Jubilee Debt Campaign (JDC) called for the IMF to sell some of its stockpile of gold to cover the debt payments owed by the world’s poorest countries for the next 15 months.  The JDC said selling less than 7% of the IMF’s gold would generate a $12bn profit, which is enough to cancel the debts owed by the 73 poorest countries until the end of 2021 and still leave the Washington-based organisation with $26bn more gold than it held at the start of the year.  The JDC and others have also called for a new issuance of Special Drawing Rights (SDR), in effect international money, to fund the poor countries.  Both these suggestions have been rejected.

Reinhart wails that “At the country level, at the multilateral level, at the G7 level, who has the financing to fill in all the big fiscal gaps that have been created or exacerbated by the pandemic?”  Answer there is none.

11 thoughts on “Debt disaster with no escape

  1. Cor blimey, if this pandemic has proved anything, it is that central banks can change the digits in the bank accounts of unemployed workers, so they can buy food and pay rent….with NO implications for inflation.

    But even you are still insisting CB’s of sovereign currency-issuing governments have to “borrow” the money…..pathetic

    Wakey, wakey….the solution has nothing to do with the IMF or anyone else selling stockpiles of gold, though in the case of some poor countries it may involve international material aid….NOT money or gold, which people can’t eat…

      1. Agree. Tongue in cheek question. I don’t see Neil is concerned about it as a point in a political program (just like nationalization of banks). instead he wants the traditional “material help,” which has always been proposed like a cliche .

    1. Absolutely. The whole world is still suffering under the illusion that money itself is wealth.
      It is not; it is a *measure* of the wealth of goods and services, allowing for convenient exchange of these goods and services.

      We are in a post gold-standard, fiat money world.

  2. “the ‘global south’ – apart from China”! Grouping China in the global south has been inaccurate and unhelpful for years. No country from the very poorest to Brazil and India exports capital like monopoly capitalist China. None of these countries has an all-round industrial sector that characterizes its economy like that of China. When one of the two superpowers in the world is put in the “global south,” the phrase loses all descriptive and explanatory value — although it might serve the political purpose of those who keep up the illusion that China is socialist or a nearly defenseless victim of U.S. imperialism.

    1. The next step in your argument is that China is even more monopoly capitalist and even more exporter of capital than the US, hence the US must be supported as the lesser evil.

      This is truly inaccurate and unhelpful and has been for years.

      The degree of capitalism is not just the percentage of nationalizations, but the degree to which capital markets determine loans, the degree to which private interests determine investments and the degree to which labor markets are regulated on behalf of employers. The US government officially deems China to be a non-market economy for a reason, at least when it needs to be honest. The rest of the time it’s just pretending the Chinese advances are proof capitalism works. Your belief that capitalism really does work is profoundly anti-socialist, by the way.

  3. Carlos writes: “instead he wants the traditional “material help,” which has always been proposed like a cliche” .

    Nonsense. What I want is activation of the currency issuing capacities of sovereign fiat-currency issuing governments, alongside money creation in private banks.

    Then the *public* covid rescue debts (not private) accumulated by ALL governments, including ‘wealthy’ ones, during the enforced lock-downs of the economy, can be dismissed with the wave of a hand…..

    Allowing these ‘wealthy’ governments to avoid ‘austerity’ which would be the case if they had to pay down debt, and thus allowing them to contribute to overseas aid for poor nations where required.

  4. This is an excellent article, comments are pretty good too. A couple of quotes from the Credit Suisse Bank’s report on Global Wealth, 2019, published 2020: “Aggregate global wealth rose by USD 9.1 trillion to USD 360.6 trillion, representing a growth rate of 2.6%. Wealth per adult grew by just 1.2% to USD 70,850 per adult in mid-2019.” There are about 5,090 million adults in the world. The decline of poverty graph indicates adults, not “people”, and it’s a percentage of adults.
    “For example, the bottom half of adults account for less than 1% of total global wealth in mid-2019, while the richest decile (top 10% of adults) possesses 82% of global wealth and the top percentile alone owns nearly half (45%) of all household assets.” And “We estimate that 2.9 billion individuals – 57% of all adults in the world – have wealth below USD 10,000 in 2019 [the math shows that comes to $1,440 of savings for all 2.5 trillion adults in the bottom half]. The next segment [32.6%], covering those with wealth in the range USD 10,000– 100,000, has seen the biggest rise in numbers this century, trebling in size from 514 million in 2000 to 1.7 billion in mid-2019. This reflects the growing prosperity of emerging economies, especially China, and the expansion of the middle class in the developing world. The average wealth of this group is USD 33,530, a little less than half the level of average wealth worldwide, but considerably above the average wealth of the countries in which most of the members reside.” [That covers 32.6% and 57%, about 90% of adults]
    If that $360 trillion were inserted into a system of cooperative aid, using Special Drawing Rights or something, a development fund that dispersed Marshall Plan grants that built improvements all over, maybe 1% or 3% each year, $4 to $12 trillion a year in hospitals, roads, education and so on. Something is wrong when so much of world resources ($$$) are rendered semi-comatose and inactive – basically hoarded. It’s been obvious that the current neoliberal set-up is a bust for LIES low-income-economic-states — structurally it is impossible to improve things using neoliberal private debt and investment approaches — you can’t attract capital into a country that is skidding into poverty, cutting social programs, reducing taxes on the wealthy. Low income countries must compete with ever-lower wages, or reinvent slavery or slave wage daily pay. Greed rules. Self interest is the core problem. Good article.

  5. Error on above: 2.5 trillion adults should read 2.5 billion adults (meaning half of the world’s adults). I did a little more on the average savings: the lower-saving 57% of all 5 billion adults own $1,440 each, the next 33% own $33,500 each, then next 10% own $280,000 each, and the last 1% own $3,200,000 each. There’s a pyramid in the report on page 9 showing these sections. It’s only money. Ann Pettifor, economist, advocates for a new financial system, I’m not clear on her proposal, maybe M. Roberts will look into it. She was active in the Jubilee Debt Forgiveness campaign. She argues that private finance is based on home mortgage payments and taxes paid by middle-earning households, the majority, and that majority has democratic power to restrain and regulate loan policies and ultimately forgive debt, partially or wholly, of any kind for any reason. And they can create money out of thin air, as well, for social purposes. It would be instructive to hear the solutions the experts are proposing for capturing the financial powerhouse that rules the world.

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