THE TTALK QUOTES


On Global Trade & Investment
Published Three Times a Week (with occasional bonus quotes) by
The Global Business Dialogue, Inc.
Washington, DC  Tel: 202-559-9316
No.30 of 2020
FRIDAY, MAY 1, 2020

Click HERE for the April 23 Trade Data Monitor quote on trade in essential food commodities.
ON COVID-19 AND DEBT

“Debt threatens to create a global development emergency in much the same way as the pandemic is creating a global health emergency."

Homi Kharas
April 13, 2020
CONTEXT
Homi Kharas is Interim Vice President of The Brookings Institution and the Director of the Brookings program on Global Economy and Development. Today’s featured quote is from an article of his that was posted on the Brookings website on April 13. The title of the piece is “What to do about the coming debt crisis in developing countries.”  It is an important article, and we’ll return to it in a moment. First, though, it is worth pointing out that it isn’t only in developing countries where COVID 19 is tearing up credit gardens. This April 25 Wall Street Journal headline, for example, points to the strains in the United States: “Millions of [U.S.] Credit-Card Customers Can’t Pay Their Bill. Lenders Are Bracing for Impact.”

And where developing countries are concerned, COVID 19 isn’t the only problem. As Mr. Kharas notes, “[N]ot all the vulnerability has been caused by the pandemic. Already, Venezuela, Argentina, and Lebanon have defaulted and face lengthy and damaging legal proceedings …” 

That said, the coronavirus pandemic is a financial nightmare for developing countries. Appropriately, Mr. Kharas begins his discussion with a few figures. “Emerging markets and developing countries have about $11 trillion in external debt and about $3.9 trillion in debt service due in 2020.” That is his first sentence. A paragraph or so later he explains:

All developing country regions are potentially seriously affected: Latin America has the highest debt service/exports ratio, Africa has the least diversified export mix, East Asia has the largest absolute amount of debt service.

With the result that:

Many developing countries simply will not have the foreign exchange to service their debt this year.

He further points out that those countries which are particularly heavily indebted, those that rely heavily on commodity exports or remittances, and those that depend on tourism are all facing virtually insurmountable challenges. To state the obvious, those now crippled income sources are relied upon for a lot more than debt service.

After setting out the problem, Mr. Kharas moves on to some historical examples. COVID 19 is unique in many respects, but it is not the first time that developing countries have faced debt crises. You will want to read his article for yourself for those examples and for his policy recommendations. As we understand him, one of Mr. Kharas’s overarching concerns is that “all creditors must participate” in whatever arrangements are made to avoid massive defaults.

COMMENT
The developed world is responding. The G20 finance ministers and central bank governor took a major step toward relieving the burdens of developing countries at their virtual meeting on April 15. In the language of the communique from that meeting: 

We support a time-bound suspension of debt service payments for the poorest countries that request forbearance.

As a Reuters article on that same meeting explained, the move by the G20 has been matched by hundreds of private creditors. Reuters further elaborated that:

The actions to freeze both principal repayments and interest payments will free up more than $20 billion for the countries to spend on improving their health systems and fighting the coronavirus pandemic, Saudi Finance Minister Mohammed al-Jadaan told reporters after a virtual meeting of G20 finance officials.

***

These actions are the leading edge of an enormous development or rather a series of developments. They rightly express and respond to well-founded concerns about the damage this pandemic in inflicting on the economies of developing countries. In the weeks ahead, we shall devote some of these pages to the COVID debt crisis in specific countries. 

It is worth keeping in mind, however, that the same developed-country government officials and business leaders who will be crafting policies to meet the crises in developing countries will also be contending with enormous new financial strains in their own countries. And they will be doing so against the background of far-from-settled attitudes about debt. 

Yes, for many debt is the seed corn of growth and the logical way of smoothing out the vicissitudes of economic life. But there are other ways of looking at it. In literature, there is Polonius advising his son Laertes , “Neither a borrower nor a lender be.” From history we have Calvin Coolidge ’s simplistic view of Britain’s debts from World War I – “They hired the money didn’t they.” And then in life--past, present and future--there are bankruptcies and foreclosures. These perspective are all likely to get fresh hearings as debt dramas play out around the world.    

SOURCES & LINKS
What to do is a link to the Brookings article by Home Kharas that was the source for today’s featured quote as well as most of the quotations in the comment section.

Credit Card Bills is a link to The Wall Street Journal article on the number of Americans who may not be able to pay their credit card bills.

G20 Communique – is a link to the Communique issued by the G20 Finance Ministers on April 15, one line of which is quoted in the Comment section above.

Payments Suspended takes you to the Reuters story on the April 15 announcement of this development from the recent meeting of G20 Finance Ministers and Central Bank Governors.
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