G20 countries have frozen official loan payments from low-income countries until the end of 2020. The IMF has made $100bn available to developing economies. Both initiatives are useful, if insufficiently generous. Private creditors, however, are resisting calls altogether for a voluntary standstill to loan repayments on commercial sovereign debt.
This position is untenable. It raises the unseemly possibility that poor countries will receive debt relief with one hand only to pay it out to private creditors, including banks and hedge funds, with the other. That money should instead be available to fight both the health and economic consequences of the Covid-19 pandemic — an entirely exogenous shock for which the world’s poorest countries are in no way to blame.
Beyond the ethical problem, an insistence on normal debt service will add balance of payments crises to the economic devastation the pandemic is already causing. The likely outcome is a disorderly cascade of defaults that will rumble on for years.
How is this mess to be resolved? There are of course difficulties with an across-the-board suspension of commercial debt service. Countries that have worked hard to gain a reputation as responsible borrowers risk ending up being lumped with those that spent recklessly. They could be locked out of debt markets for years. Some bondholders will also challenge a standstill, raising the prospect of lengthy court battles.
A standstill thus needs to be negotiated by a multilateral body such as the IMF. G20 countries, especially those under whose laws the debt is issued, should press their own financial institutions to accept a deal. After all, many of those entities are benefiting from massive financial support by central banks.
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Clever institutional schemes can help protect poor countries from the taint of default and make a standstill more palatable to creditors. One idea would see governments funnel debt payments into a trust managed by, say, the World Bank, from which they could borrow to fight Covid-19. Once the crisis has passed, debt restructuring can take place if necessary. In preparation, the world’s economic policymakers ought to revive earlier efforts at building a global sovereign debt restructuring mechanism.
Even this would leave problems, most pressing of which is what to do about middle-income countries. They too risk balance of payments crises. The IMF has put the combined financing needs of low and middle-income economies at $2.5tn or more.
One solution would have been to issue $1tn in new special drawing rights — a global equivalent of rich countries’ money-printing by central banks — but this plan has been vetoed by Washington. The US should rethink — or propose another way of getting sufficient resources to poorer countries.
In the end, it matters less how the money reaches developing economies than that there is a net inflow of resources. It is also vital that China participates, as it has in the G20 standstill. If Beijing insists on bilateral negotiations, it will, rightly, be accused of freeriding on the debt forgiveness initiatives of others.
An economic collapse in poorer countries would threaten financial stability elsewhere and damage the world’s ability to contain the coronavirus. The governments of rich countries have rightly lavished trillions of dollars on their own companies and citizens to help offset the economic toll. Enlightened self-interest, as well as common decency, demand similar treatment for the poorest people in the world.
Source: Economy - ft.com
