This nightmare scenario is preventable if we act now. The origins of today’s looming debt crisis are easy to understand. As a result of quantitative easing, the public debt (mainly sovereign bonds) of low and middle income countries has more than tripled since the global financial crisis of 2008. Sovereign bonds are riskier than the “official” debt of institutions. multilateral agencies and aid agencies to developed countries as creditors may abandon them on a whim, causing sharp currency depreciation and other large-scale economic disruptions.
In June 2013, we feared that “short-sighted financial markets, working with short-sighted governments”, “lay the groundwork for the next global debt crisis.” Now the day of judgment has come. Last March, the United Nations called for debt relief for the world’s least developed countries. Several G20 countries and the International Monetary Fund have suspended debt service for the year and called on private creditors to follow suit.
Not surprisingly, these calls have fallen on deaf ears. The newly created African Private Creditors Working Group, for example, has already rejected the idea of modest but widespread debt relief for poor countries. As a result, much, if not most, of the benefits of public creditors’ debt relief will flow to private creditors who are unwilling to provide debt relief.
The result is that taxpayers in creditor countries will once again end up bailing out excessive risk-taking and reckless lending by private actors. The only way to avoid this is to have a comprehensive debt status quo that includes private creditors. But without vigorous action from the countries in which the debt contracts are drawn up, private creditors are unlikely to agree to such an arrangement. These governments must therefore invoke the doctrines of necessity and force majeure to impose a complete freeze on debt service.
But the breaks will not solve the systemic problem of excessive debt. For that, we urgently need a deep restructuring of the debt. History shows that for many countries, restructuring that is too weak, too late, only sets the stage for another crisis. And Argentina’s long struggle to restructure its debt in the face of recalcitrant, short-sighted, hard-headed, hard-hearted private creditors has shown that collective action clauses designed to facilitate restructuring are not as effective. as we hoped.
More often than not, an inadequate restructuring is followed by another restructuring within five years, with enormous suffering on the part of the inhabitants of the debtor country. Even creditors lose, in the long run.
Fortunately, there is an underutilized alternative: voluntary sovereign debt buybacks. Debt buybacks are widespread in the corporate world and have proven effective both in Latin America in the 1990s and, more recently, in the Greek context. And they have the advantage of avoiding the harsh conditions that usually accompany debt swaps.
The main objective of a buyback program would be to reduce the debt burden by obtaining significant haircuts (haircuts) on the face value of sovereign bonds and by minimizing exposure to risky private creditors. But a buyback program could also be designed to advance health and climate goals, requiring recipients to spend money that would otherwise have been used to service debt to create public goods.
As we explain in a recent proposal, a multilateral buyback facility could be managed by the IMF, which can use the resources already available, its function of new borrowing agreements and additional funds from a global consortium of countries and multilateral institutions. Countries that do not need their full allocation of Special Drawing Rights, the IMF’s unit of account, could donate or lend to the new facility. A new issue of SDR, the need for which is clear, could still provide additional resources. To ensure maximum debt reduction for a given expenditure, the IMF could proceed with an auction, announcing that it will only buy back a limited amount of bonds.
In the long term, a predictable, rules-based debt restructuring mechanism, modeled on US municipal bankruptcy law (“Chapter 9”) is needed. This would be in line with the recommendations of the United Nations Commission of Experts on Reforms of the International Monetary and Financial System after 2008.
The usual objection to such proposals is that they would destroy the international capital market. But experience shows the opposite. You can’t squeeze water out of a stone. There will be a restructuring – the only question is whether it will be orderly. Our proposals would help achieve this objective and thus strengthen financial markets.
Ultimately, however, our concern should not be the health of financial markets, but the well-being of people in developing and emerging countries. There is an urgent need for debt relief now, in the midst of the pandemic. It must be complete – including private creditors – and more than just a debt stop. We have the tools to do it. All we need is the political will.
The opinions expressed here are those of the authors and do not reflect the views of the United Nations or its Member States.
• Joseph E Stiglitz is a Nobel Laureate in Economics, University Professor at Columbia University, and Chief Economist at the Roosevelt Institute.
• Hamid Rashid, former Director General of Multilateral Economic Affairs at the Ministry of Foreign Affairs of Bangladesh and Senior Advisor in the Bureau for Development Policy of UNDP, is Chief of Global Economic Monitoring in the United Nations Department of Economic and Social Affairs.
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