The American Interest | Wed, Jul 1, 2020
by Frank Vogl
The COVID crisis has injected a legitimate humanitarian imperative into bailing countries out of a sovereign debt crisis of historic proportions. The hastiness of the bailouts, however, is setting up all sorts of dire unintended consequences.
There has never been an international sovereign debt crisis on the scale of what is now unfolding. The International Monetary Fund (IMF)—the lender of last resort to governments—reports that more than 100 countries have requested emergency loans.
Normally, the IMF looks solely at the levels of economic distress in determining whether to grant loans. This time, humanitarian concerns are running right through what is rapidly evolving into an unprecedented disruption of global sovereign bond markets. The COVID-19 pandemic is producing severe balance-of-payments strains for many economies. Many debt-laden nations are in urgent need of food, medical and other essential imports, and require emergency loans and debt relief.
For years, governments across the world have raised vast sums through international bond issues—World Bank data shows that excluding China, the total stock of long-term international debt held by middle- and low-income level countries amounts to approximately $4.8 trillion.
The bankers who manage these issues, and the investors who purchase them, have had a single-minded focus on securing a high rate of return on their cash. They have frequently ignored the fact that many bond issues have been on behalf of kleptocratic regimes—indeed, the international bond financing system has enabled international grand corruption.