Last week the government in Argentina received a badly-needed boost: the IMF finally agreed to restructure a $57bn loan, averting an imminent default. That is good(ish) news for Alberto Fernández, the country’s president. It is also a face-saving reprieve for IMF staff, given the history of the fund’s embarrassing failures around Argentina.
For global investors, however, the deal should be a wake-up call — and not just because it underscores the intractable nature of Argentina’s unaddressed structural woes. It also poses a far bigger question: what will happen to the rest of the world’s troubled sovereign debt this year, particularly among the poorer countries that cannot count on this scale of IMF largesse?
The issue is alarming for three reasons. First, western politicians and voters have been depressingly complacent about the scale of economic and human pain that the pandemic has inflicted on poor countries in the past two years. The news from Argentina, for example, barely garnered any headlines.
Second, while this pain has been largely ignored in the west, it is getting worse. So much so that David Malpass, World Bank president, warned last month that the world is now heading into a swath of “disorderly defaults” among poorer nations.
Meanwhile, the IMF reckons that 60 per cent of low-income countries now face debt distress. This is double that of 2015. Investors are bracing for potential defaults by LICs such as Sri Lanka, Ghana, Tunisia and El Salvador — as well as middle-income countries such as Lebanon, Turkey and Ukraine. Rising US interest rates will make the pressure on these countries worse.
The third big problem, though, is that the financial processes to resolve and restructure these debts are fraying.
During the second half of the 20th century, the western world organised restructurings of poor-country debt by using the “Paris Club” framework. This enabled creditor nations to cut deals backed up by institutions such as the IMF and the “London Club” of commercial lenders.
Such a western-centric approach no longer works. A startling IMF chart shows why: a decade ago, low-income countries had about $80bn of public external bilateral debt (excluding multilateral and private loans). Two-thirds emanated from Paris Club lenders.
Today, these debts top $200bn, and under one-third is lent by the Paris Club. The rest is mostly owed to China, which has expanded its liens so frenetically that it is now “the largest lender to the emerging markets”, as a new, hard-hitting report from a Bretton Woods committee of financial luminaries notes.
This radical change makes the Paris Club mechanism less relevant, particularly since the nature and scale of those Chinese loans is deeply opaque. AidData, a US research group, thinks that emerging market countries have another $385bn of hidden Chinese debt, which is uncounted in official statistics.
The situation in Zambia illustrates this problem. Two years ago western creditors tried to negotiate a settlement for its debt, but because Zambia refused to disclose its Chinese debts there was “a level of distrust that made it virtually impossible to make progress on the country’s restructuring”, the Bretton Woods report notes.
Worse still, there are swelling, and opaque, exposures to private sector companies and hedge funds. Many of those lenders are increasingly aggressive. Efforts to restructure Chad’s debts, for example, have been complicated by its loans from Glencore, the mining group.
Is there any fix? The Bretton Woods report argues that one crucial step would be for governments to create a unified, transparent database of their debts. It calls on rating agencies, multilateral banks and investors with environmental and social governance mandates to lobby for this.
It also argues that the old Paris Club framework should be overhauled to give China a proper seat at the table. Finally, it calls for private sector lenders to be incorporated into negotiations at a much earlier stage.
This is entirely sensible. Moreover, these ideas are supported by bodies including the IMF, which has been trying, and largely failing, to create a more rational framework in recent years. But the real uncertainty is whether the Group of 20 nations in general, and China in particular, will play ball.
The IMF is now imploring the G20 to take action. Kristalina Georgieva, head of the IMF, thinks — or hopes — that this progress could occur this year, particularly since Indonesia is the incoming chair of the G20. “Indonesia has a better chance of getting emerging market countries and China into [an] agreement,” she told the Financial Times this week.
Yet the Beijing government seems internally split about whether to co-operate. Moreover, the history of the G20 suggests that it is such a reactive group that it is unlikely to take action until there is a full-blown debt crisis on its hands. That, of course, is the last thing a pandemic-scarred world needs.
Hence the reason why western politicians, not to mention investors, urgently need to heed Argentina’s message. Although it might seem tempting to keep papering over poor (and not so poor) countries’ debt problems, this will not magically fix them. Let us pray that Indonesia can work some magic.
gillian.tett@ft.com