There is an urgent need for wide-ranging debt relief in the midst of the coronavirus pandemic.
By Joseph Stiglitz and Hamid Rashid and cross-posted from The Guardian.
While the Covid-19 pandemic rages, more than 100 low- and middle-income countries will still have to pay a combined $130bn in debt service this year – around half of which is owed to private creditors. With much economic activity suspended and fiscal revenues in free fall, many countries will be forced to default. Others will cobble together scarce resources to pay creditors, cutting back on much-needed health and social expenditures. Still others will resort to additional borrowing, kicking the proverbial can down the road, seemingly easier now because of the flood of liquidity from central banks around the world.
From Latin America’s lost decade in the 1980s to the more recent Greek crisis, there are plenty of painful reminders of what happens when countries cannot service their debts. A global debt crisis today will push millions of people into unemployment and fuel instability and violence around the world. Many will seek jobs abroad, potentially overwhelming border-control and immigration systems in Europe and North America. Another costly migration crisis will divert attention away from the urgent need to address climate change. Such humanitarian emergencies are becoming the new norm.
This nightmare scenario is avoidable if we act now. The origins of today’s looming debt crisis are easy to understand. Owing to quantitative easing, 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, triggering a sharp currency depreciation and other far-reaching economic disruptions.
Back in June 2013, we worried that “shortsighted financial markets, working with shortsighted governments,” were “laying the groundwork for the world’s next debt crisis.” Now, the day of reckoning has come. This past 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 have called upon private creditors to follow suit.
Unsurprisingly, these calls have fallen on deaf ears. The newly formed Africa Private Creditor Working Group, for example, has already rejected the idea of modest but broad-based debt relief for poor countries. As a result, much, if not most, of the benefits of debt relief from official creditors will accrue to the private creditors who are unwilling to provide any debt relief…