Urgent need to restructure emerging markets debt

Without more permanent debt relief, more people in developing countries will slide back into poverty.

15 January 2021 | Economics

DAVID LAWDER AND KARIN STROHECKER

Increasing debt distress in emerging markets means that China, now the world's largest official creditor, will need to start restructuring debts in the same way that Paris Club lenders did in past crises.

"What I think China will need to do to confront this is what previous other creditors in the past had done, which is you have to restructure. And restructure big time, meaning either lower interest rates, longer maturities, write-off in principal or some combination of that,” World Bank Chief Economist Carmen Reinhart said.

She said that during the Covid-19 pandemic, China would need to take on a "new role" that has been an "old role" for Paris Club lenders, as Beijing is now facing for the first-time wider spreads and difficulties in countries' ability to service debt on a broad scale.

Research

China has signed up to a G20 debt suspension initiative that allows up to 73 of the world's poorest countries to halt payments on official bilateral debts to help fund critical health initiatives, and it has agreed to a further G20 debt restructuring framework.

Reinhart, a Harvard economist who joined the World Bank in June 2020, has researched and written extensively on financial crises. Last year, she co-authored a scholarly paper on China's overseas lending that found that as much as 50% of it is not reported to the World Bank or International Monetary Fund.

World Bank President David Malpass has warned that without more permanent debt relief, more people in developing countries will slide back into poverty and a repeat of the disorderly defaults of the 1980s could occur. He has pressed China for full participation in the debt relief efforts, including on debt issued by state-owned enterprises. - Nampa/Reuters

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