‘Illusion’ of stability hides unsustainable borrowing and rising poverty, says Guterres
The world faces severe problems of debt sustainability in the wake of the coronavirus crisis that have not been properly understood or addressed, and which threaten to tip developing countries into a rising wave of hunger, poverty, social unrest and conflict, António Guterres, secretary-general of the UN, has warned.
“The response to Covid and to the financial aspects [of the crisis] has been fragmented, and geopolitical divides are not helping,” Guterres told the Financial Times. “It has been too limited in scope and too late.”
Guterres said the fact that only six countries had defaulted on their foreign debts last year — Argentina, Belize, Ecuador, Lebanon, Suriname and Zambia — had created the “illusion” of stability and a “misperception of the seriousness of the situation”.
Large, middle-income developing countries such as Brazil and South Africa had borrowed heavily from domestic lenders rather than from foreign investors, at interest rates much higher than those available to rich countries, making the dangers less visible than in previous emerging market debt crises, he said.
Brazil, in particular, had sharply shortened the average maturities of government bonds issued in local currency from five-and-a-half years before the crisis, according to its central bank, to just two years in 2020. This lowers the cost of debt but means it must be repaid more quickly, potentially problematic in a crisis.
“They are essentially borrowing in the internal market but maturities are coming down,” Guterres said. “This is a very bad signal. There is an illusion of sustainability but it risks bringing quite dramatic surprises, especially if the recovery is slower than expected from the slower access to vaccines.”
Jair Bolsonaro, Brazil’s populist rightwing president, has mocked his citizens for complaining about the country’s high death toll and only this month accepted the need to vaccinate against the disease.
Guterres said that, in failing to address debt sustainability, “the risk is that we compromise the recovery of the economies of the developing world with catastrophic consequences for people’s lives, with an increase in hunger and poverty and dramatic problems with health and education systems, in many cases leading to instability, social unrest and, at the limit, conflict. Everything is now interlinked.”
The World Bank estimates that about 120m people have been pushed into poverty by the pandemic, with the majority of the “new poor” in middle-income countries.
Guterres was speaking before the launch on Monday of UN proposals for dealing with the debts of low and middle-income countries, including new finance from the IMF through an issue of its special drawing rights, or SDRs — a form of reserve asset that is used to supplement the official reserves of IMF member countries.
The G7 group of rich democracies recently backed the move, also supported by the US after President Joe Biden’s administration reversed last year’s veto under Donald Trump. It is expected to be approved by the G20 group of the world’s largest economies during the spring meetings of the IMF and World Bank next week.
Guterres said that, in addition to a new allocation of SDRs, wealthy countries should pool their existing SDRs through the IMF’s Poverty Reduction and Growth Trust for low-income countries and through a new facility to be created to channel funding to vulnerable middle-income countries. That applied especially to small island states that have been badly hit by the pandemic but are excluded from initiatives launched by the G20 last year, he said.
These include a debt service suspension initiative (DSSI) to provide temporary relief from debt repayments for 73 eligible poor countries, of which 46 have applied to take part. The DSSI is due to expire at the end of June. Guterres said it should be extended by at least another year and its scope broadened to include more countries.
The UN will also call for more concessionary lending through multilateral development banks, alongside measures to increase debt transparency and to ensure the participation of private sector creditors in debt relief, which previous initiatives have tried but failed to secure. It will also propose mechanisms to facilitate early debt workouts and to encourage an increase in private-sector finance through credit enhancements such as debt guarantees.
Guterres rejected the suggestion that such measures themselves were timid compared with the size of the emerging debt problem. “Some of these things are quite radical,” he said. “This will be the biggest issue of SDRs in history. It will break taboos. If multilateral and national institutions are ready to enter into partnerships and provide guarantees, we can create incentives for the financial sector to mobilise a lot of additional private funding.”
Originally published on Financial Times