Patrick Semansky/AP Photo
International Monetary Fund Managing Director Kristalina Georgieva speaks at a news conference during the annual meeting of the IMF and the World Bank Group, October 13, 2022, in Washington.
More than 60 percent of the world’s poorest countries and 25 percent of middle-income countries are already in or at high risk of debt distress, according to the International Monetary Fund’s grim new calculations.
“This will only get worse if interest rates rise further, the dollar gets stronger, and capital outflows increase,” IMF Managing Director Kristalina Georgieva said at the opening of last week’s annual meetings of the IMF and World Bank in Washington.
That, of course, is the expected plan of attack for the Federal Reserve over the next several months as it fights inflation with interest rate hikes, which are now expected to close in on a 5 percent “terminal rate” before subsiding.
Georgieva and U.S. Treasury Secretary Janet Yellen have both acknowledged the role of rising dollar interest rates in developing countries’ pain. A stronger dollar makes it harder for poor and middle-income countries to pay interest and keep the economy functioning at a basic level.
But while top economic officials and representatives from credit rating agencies widely agreed that the coming months will bring a series of defaults, they are betting that these will be one-off events—painful for the countries that undergo them, but unlikely to cascade into global financial risk.
“It’s not as though we have a systemic sovereign debt crisis,” IMF Deputy Managing Director Gita Gopinath said on a panel about debt distress.
Elena Duggar, who chairs the Macroeconomic Board of the credit rating agency Moody’s, agreed. The Macroeconomic Board is charged with developing forecasts about the global economy, which are used in the rating process. “We do not expect a widespread emerging-markets debt crisis, but given the negative turn in credit conditions, we do expect the number of defaults to pick up,” Duggar said on the panel. She pointed out that there have already been six sovereign defaults this year. The average year has one or two.
American officials emphasized that China and commercial lenders are blocking debt restructuring, and that since the countries so far in default are not systemically important, the global economy can muddle through. But according to several representatives of poorer countries, that’s not only a cynical way for an institution charged with global economic stability to enter the oncoming crises, it’s also a risky bet.
“The U.S. has a long-term track record of thinking its spillover effects are more contained than they are,” said Avinash Persaud, a senior economic adviser to the prime minister of Barbados. “That’s the kind of thinking that has gotten us into global financial crises.”
THE LACK OF A COORDINATED RESPONSE to the debt crisis stems from geopolitical tensions and a hairy creditor mix.
During the Latin American debt crisis of the 1980s, low- and middle-income countries owed much of their debt in bilateral loans to countries in the Paris Club, an informal group of rich creditor nations, and to commercial lenders within those countries. European, North American, and Japanese banks were major creditors, and policymakers in those countries stepped in to restructure debt, fearing that their exposure could set off a banking crisis.
A stronger dollar makes it harder for poor and middle-income countries to pay interest and keep the economy functioning at a basic level.
Today, global debt levels have surged, but lending is more diffuse and complex. A significant share of emerging-market debt is held by China, and by commercial lenders like PIMCO, BlackRock, and Vanguard. Then there are custom-made dilemmas like lending by the oil trader Glencore, the largest private external creditor to cash-strapped Chad.
In 1996, the Heavily Indebted Poor Countries (HIPC) Initiative created a framework for debt relief in the most vulnerable countries. But the World Bank says a similar initiative would be impossible today, since it would be hard to wrangle the disparate creditors. (In The Guardian, World Bank chief economist Indermit Gill appeared to signal support for a round of HIPC-like structured debt relief. But Gill has also written that “‘moral suasion’ could not be more futile” under the current circumstances, given private creditors’ large share of debt.)
Meanwhile, the United States has repeatedly singled out a holdout on debt relief. “Really, the barrier to making greater progress is one important creditor country, namely China,” Yellen said at a concluding press conference for the annual meetings. China has pointed out that if it takes losses on major loans, those could go to pay off Western commercial lenders.
AMERICAN POLICYMAKERS SAY the gridlock is bearable, for now, since the countries most affected by debt distress are unlikely to set off broader crises.
“LICs [low income countries] aren’t systemic. I’m not expecting contagion as in the Asia crisis,” said Mark Sobel, a veteran Treasury official who now serves as the U.S. chair of the Official Monetary and Financial Institutions Forum. While Sobel acknowledged that some major middle-income countries face debt distress, he downplayed the role of the U.S. Fed’s rate hikes on their economic challenges.
“Pakistan, Sri Lanka, Argentina, Egypt, Turkey—these are countries that have homegrown problems. You can’t really say it’s the Fed,” he told the Prospect. “There are global phenomena that are relevant to them, but they’re also not innocent bystanders.”
The largest emerging markets, like Brazil, Indonesia, and India, have so far proved resilient, partly because they have stockpiled foreign exchange reserves that are helping them to weather the crisis. But big countries like Egypt, Nigeria, and Pakistan are facing adverse conditions with fewer buffers.
Others disputed the claim that the risk of contagion is insignificant. Several pointed to the U.K., where a recent decision to cut taxes amid high inflation set off a currency crisis. A new report by the European Systemic Risk Board, set up after the 2008 financial crisis, recently issued a general warning on financial risk in Europe.
Whether or not emerging-market failures carry cascading risks, they could potentially affect billions of people. Middle-income economies represent five billion people and around 70 percent of the world’s poor. “Any single country’s sovereign debt default is systemic for that country,” Anna Gelpern, a sovereign debt expert at Georgetown University, told the Prospect. “Even if, say, Argentina’s debt default in 2001 wasn’t necessarily destabilizing for the world, it was mightily systemic for Argentina, where all the banks and borrowers were underwater. Massive, system-wide insolvency.”
The Arab Spring protests of the 2010s did not spark off a global crisis, but instability and unrest due to high food prices had a prolonged impact on the region. A recurring theme at the annual meetings was whether the United States and other advanced economies will be a reliable partner for the Global South, as countries forge new alliances during a time of significant geopolitical instability.
Currently, developing countries are expressing growing skepticism. Last week, with the annual meetings under way, the U.N. General Assembly voted to condemn Russia’s recent annexation of Ukrainian territory. But despite efforts by the United States to rally support for the anti-Russia posture, 35 countries abstained, including China, India, Pakistan, and South Africa.
YELLEN HAS ACKNOWLEDGED that the strong dollar may have “international spillovers.” (Fed Vice Chair Lael Brainard has gone further, talking not only of spillovers but of “spillbacks” implicating advanced economies.)
“Many emerging-market countries have very little fiscal space, and face a host of significant problems including higher energy and food prices that are driving another 75 million people this year into risk of starvation,” Yellen said at the meetings. She argued that economies face different challenges that require different policy approaches.
Yet IMF policy advice points in another direction. Going forward, despite historic debt levels and following deep cuts to public spending, the IMF is urging governments to pursue further belt-tightening, offsetting any new spending with savings or new revenue.
That prescription looks increasingly infeasible for many middle-income countries facing long-term double-digit interest rates, a situation that invites market speculation. Governments are avoiding default by cutting spending on health and education, but many have already trimmed the fat in their budgets, and lack fiscal space for additional cuts.
In a new agenda that was widely discussed at the conference, Persaud, of Barbados, argues that debt-strained countries need short-term credit facilities to tide them over through the present crisis. He points out that most financial crises start as liquidity crises.
While the IMF announced a new food shock borrowing program ahead of the annual meetings, however, it has declined to return access to liquidity facilities opened during the coronavirus crisis.
“THIS MEETING IS NOT GOING TO BE REMEMBERED for anything except being a missed opportunity,” former World Bank economist Larry Summers said of the annual meetings. Summers joined a chorus of voices calling for greater finance for climate change adaptation and mitigation. At the conference, Yellen called on the World Bank to scale up available capital for the energy transition.
Stakeholders at the annual meetings will reconvene next month for climate change negotiations at the United Nations COP27 conference in Sharm el-Sheikh, Egypt. But given the failure to coordinate a policy response to the current debt crisis, said Richard Kozul-Wright of the United Nations Conference on Trade and Development, “it all feels slightly theatrical.”
Many African finance ministers see it as hypocritical for the U.S. and Europe to emphasize poor countries’ rapid transition to clean energy, even as they scale up their own export and reliance on fossil fuels.
Egyptian Foreign Minister Sameh Shoukry, who will chair COP27 talks, wrote last week that international financial institutions should provide “highly concessional grant-based climate finance to the Global South.”
Some signs are promising, like the launch of a new Resilience and Sustainability Trust geared to that purpose. But the fiscal squeeze and growth slowdown will likely mean lost investment in climate-resilient infrastructure, which has high up-front capital costs and less of an existing investor constituency. In an interview at the meetings, Angola’s Minister of Economy and Planning Mário João told the Prospect that African countries are having no trouble finding new lending for fossil fuel development.
Angola is optimistic about continued investment from TotalEnergies, the French oil major. “Their appetite will never go down. It is in oil that they find resources to diversify. If they want to go to green energy, they’ll have to have a good source of capital to help do the transition,” João said.
By contrast, he said, “the World Bank is a bank for the poor. Fossil fuel has its own market. It’s a big commodity that can pay for its own investment. You don’t need the World Bank for that.”
