The UN’s Sovereign Debt Meltdown Scoop

The UN Conference on Trade and Development (UNCTAD), in a report “From Great Lockdown to Meltdown,” highlighted the developing world’s cramped fiscal and monetary space to tackle coronavirus amid “critical” foreign debt burdens and called for reconsideration of a global restructuring body. The idea had gained momentum through the IMF two decades ago after the Asian financial crisis and its aftermath, but the US Treasury department and major emerging markets were lukewarm, and it was recently revived by academics including Argentina’s now Finance Minister as he proposed separately large reductions and delays in an exchange offer after the Fund declared the $60 billion outstanding unsustainable. Creditor groups spurned these terms and accused the government of repeating a pattern of not negotiating in good faith and sharing information. Economic forecasts were further clouded with Covid’s onset, with officials ordering mass closures and unleashing social spending and business support. In low income countries, the outsize informal sector does not fall under this safety net, and the choice is between starvation and illness, UNCTAD believes. Public and private debt combined is already 200% of GDP for the broad universe, as previously untied aid has fallen and relates to specific environmental and governance conditions. External debt is widely held commercially, and non-residents own double-digit portions of local bonds. Servicing costs roughly doubled to 10% of GDP the past five years, and trillions of dollars come due this year and next against the paltry estimated $20 billion bilateral pause the G-20 agreed mainly for the poorest countries. The first to formally ask was Pakistan in the next income category although it qualifies also for development lender concessional terms, and has also lost access to Gulf remittances and assistance. Outright relief is not on the table, and traditional facilities do not meet the scope and flexibility the unique health challenge requires. With increased Special Drawing Right (SDR) issuance also a non-starter with US opposition, the publication urges an overdue “new deal” starting with longer and more comprehensive standstills as a prelude to actual restructuring on a case by case basis. As a historic precedent it cites a 1950s conference on German war reparations, and targets $1 trillion in cancellation, At the same time through treaty an “International Debt Authority” would oversee the process, to reprise the 2000s push and fill a 75th anniversary gap left from the original Bretton Woods agreements. In an update also released in April the Bank for International Settlements (BIS) showed 5% higher cross-border lending through end-2019, although emerging market lines were up slightly. They were divided evenly between local and foreign claims in major regions, but short-term maturities less than a year at almost $2 trillion were half the former. The highest shares at 60% plus of the total were in China and Korea, while in Poland, Russia and Turkey they were below 50%. Austrian and Spanish banks have majority developing market exposure in global books, and US and UK ones tilt toward short-term credit. Untapped facilities came to $600 billion, one-tenth of the total stock, and the next installment will reveal if they were locked or used for virus lockdown.

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