How to Prevent the Looming Debt Crisis

Business Standard 13th August 2020 Save

Context: A global sovereign debt crisis today would push millions into unemployment and fuel violence around the world. We have the tools to prevent it, we only need the political will.

Issues with rising sovereign debt:

Extreme indebtedness: More than 100 low- and middle-income countries will still have to pay a combined $130 billion in debt service this year — around half of which is owed to private creditors.
Leads to sharp unemployment and may fuel violence.
Costly Migration crisis: since people will seek jobs abroad, overwhelming the immigration control of developed nations like the European Union and the United States.
The burden on Taxpayers: Taxpayers in creditor countries will end up bailing out excessive risk-taking and imprudent lending by private actors.

Reasons for rising global sovereign debt

The increasing trend of Quantitative Easing (QE):

The public debt (mostly sovereign bonds) of low- and middle-income countries has more than tripled since the 2008 global financial crisis.
Sovereign bonds are riskier than “official” debt from multilateral institutions and developed-country aid agencies because creditors can dump them on a whim.
This triggers a sharp currency depreciation and other far-reaching economic disruptions.

Neglected international calls for debt-relief:

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.
The Africa Private Creditor Working Group, has rejected the idea of modest but broad-based debt relief for poor countries.

Inadequate Restructuring: is followed by another restructuring within five years, with enormous suffering on the part of those in the debtor country.

Way Forward:

Enforce Comprehensive Debt Standstill: To avoid rising debt due to imprudent lending by private creditors -

Governments must invoke the doctrines of necessity and force majeure to enforce comprehensive standstills on debt service.

Sufficient and Timely Debt Restructuring: History shows that for many countries, a restructuring that is too little, too late merely sets the stage for another crisis. - For E.g. in Argentina.

Rule-based debt restructuring: modelled after the United States’ municipal bankruptcy legislation is needed.

Keeping in line with recommendations of the post-2008 UN Commission of Experts on Reforms of the International Monetary and Financial System.
If the restructuring being orderly, it would strengthen capital markets rather than traditionally believed to be hurting them.

Voluntary Sovereign-debt buybacks: Debt buybacks are widespread in the corporate world and have proved effective both in Latin America in the 1990s and, recently in the Greek context.

Advantage:

They avoid harsh terms that typically form a part of debt swaps.
A buyback programme could also be designed to advance health and climate goals.

Principle Objective: To reduce debt burdens by securing significant discounts (haircuts) on the face value of sovereign bonds, and by minimising exposure to risky private creditors.
Employing Available Resources: a multilateral buyback facility could be managed by the International Monetary Fund (IMF) with its New Arrangements to Borrow function.