ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Lessons from a Zambian Stand-off

The Zambian experience suggests that the prevailing international financial architecture aims to get bilateral creditors, in this case principally China, to carry the burden of a restructuring process which protects the interests of, and even favours, private creditors who leveraged cheap capital and rushed into the less developed country market in search of high yields.

Swapping Debt for Nature

A financially significant deal announced by the Government of Ecuador and Credit Suisse (prior to its merger with UBS) in May 2023, has raised the prospect of debt-stressed countries writing down distressed debt on favourable terms in return for a commitment to allocate part of the “savings” for conservation or climate projects. This “debt-for-nature” swap is one in a recent series which, unlike in the past, has been structured and arranged by private players, with “blue or green” bond issues that raise the money to finance the buyback of expensive debt at heavily discounted prices. The combination of debt reduction, improved debt terms and locked-in conservation spending is presented as a “win-win” outcome for all concerned. But as critics have been quick to point out, there is much to be wary of in these complex transactions.

IMF—Doubling the Dose of Austerity

Evidence from Ghana and reports from Sri Lanka indicate that the International Monetary Fund has introduced a new condition—reduction through the restructuring of domestic sovereign debt—into its adjustment toolkit for countries facing external debt stress. This tendency to blur the distinction between domestic and external debt has major implications, and amounts to imposing measures that enforce a new and additional form of debilitating austerity on these countries.

Resolving the Debt Crisis

As the number of developing countries likely to default on external debt service commitments increases, the effort to resolve debt crises in countries that have defaulted many months back remains unsuccessful.

Another Global Debt Crisis

When multiple crises confront global leaders, some yet-brewing ones tend to be ignored. One such is an(other) imminent external debt crisis in developing countries, which, as in the case of the COVID-19 crisis, is likely to be prolonged with long-term spillovers. However, while most observers admit that another external debt crisis is imminent, a commitment to find a lasting solution is absent. Not because the elements of such a solution are not obvious. With the COVID-19 pandemic and the Ukraine invasion having made this round of the debt crisis even more difficult to resolve, there is little option but to resort to a package that includes official debt write-offs, large private creditor haircuts and the channelling of cheap liquidity to less developed countries through mechanisms like enhanced Special Drawing Rights issues.

The Renewed Fear of Bad Debt

The evidence of a decline in the non-performing assets ratio in India’s banking system points to a significant improvement in the health of banks. However, this may have occurred partly through the use of write-offs that erode the capital base of banks and also because of the time-bound moratorium on debt repayments announced as part of measures to address the effects of the pandemic on small units and other selected borrowers. In the circumstances, even though new pandemic-linked lending to micro, small and medium enterprises was partly guaranteed by the government, a rise in the NPA ratios and further erosion of bank capital seem inevitable.

 

Down the Rabbit Hole

The finance minister’s Budget speech 2021 revealed the government’s plans to establish an Asset Reconstruction Company to take over bad debt from the books of public sector banks for eventual disposal. That suggests that the ARC route rather than recapitalisation would in the coming months be the main means of refurbishing capital in the public banking system. Since there are as many as 28 ARCs already in existence, the reason why the creation of one more would resolve a problem that is expected to worsen over the coming year is unclear. In fact, past experience indicates that ARCs have not helped enhance the actual recovery of lock-up in stressed assets. This suggests that the move is a means to postpone the problem of bad debt resolution so as to avoid having to recapitalise the banks with budgetary resources, which would widen the central fiscal deficit.

 

Financial Fragility in ‘Mature’ Markets

With rising non-financial corporate debt and evidence of elevated borrowing levels among non-bank financial companies, the fragility resulting from excess leverage has returned to haunt developed country financial markets.

The Challenge of LDC Debt

A challenge set by the Covid-19-induced economic crisis that would be difficult to address is the external debt crisis engulfing developing countries. While the G-20 with its Debt Service Suspension Initiative appeared to recognise the problem, the evidence indicates that the international community is unwilling to do what is needed. There are enough proposals on the table, but inadequate commitment among those sitting around it.

 

A Faulty Response to the COVID-19-induced Crisis

India’s response to the COVID-19-induced economic crisis is proving to be ineffective. The neo-liberal embrace of monetary measures that infuse cheap liquidity as a substitute for fiscal activism has not resulted in faster credit growth. The reliance on banks and credit to mediate the stimulus, rather than directly injecting demand through government spending, is not working. Agents overwhelmed by a demand recession are not seen by banks as creditworthy borrowers, and the former in turn are reticent to borrow, fearing that they will not be able to service the debt.

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