Debt Crisis will Delay Global Recovery
Reuters | Thu, May 28, 2020
by William R. Rhodes and Stuart P.M. Mackintosh
The Covid-19 pandemic will spark hugely damaging debt defaults in developing countries, hampering rebuilding and recovery. Many emerging markets borrowed heavily both from official governmental lenders, as well as from international private sector investors, mostly in U.S. dollars. Now they are confronted by rising debt service costs at a time of rising economic difficulties and capital flight. We must start planning for this right away.
How can we best mitigate the emerging markets debt crisis? The International Monetary Fund requires additional resources as it now faces immediate requests for fast-disbursing loans from a record 102 countries and will face a deluge of follow-on loan requests in coming months. It estimates 40% of low-income nations are wrestling with debt distress.
The United States has resisted an increase in IMF Special Drawing Rights, which is needed to increase the capital available for lending. That may leave the institution unable to respond on the scale required. President Donald Trump’s administration is forgetting that the fund performs an essential emergency response role at an extremely low cost to taxpayers and is much less costly than permitting crises to cascade or relying on bilateral responses.
The current moratorium on debt payments from an initiative backed by the Group of 20 major economies to the hardest-pressed nations runs until the end of the year. But there is no clear outline for what happens after that. And the IMF says some of the worst-hit are reluctant to participate out of concern it could hurt their credit ratings and future market access.