Shawn Donnan, Matthew Hill, Tom Hancock and Eric Martin
Tue, February 21, 2023
(Bloomberg) -- In the realm of global economic policy, Friday Nov. 13, 2020, was meant to be about hope — not the trigger for another pandemic-era fright.
That’s when Group of 20 finance ministers announced final agreement on a blueprint for the US, China and other relatively new creditor countries like India to cooperate on debt relief for more than 70 low-income nations facing a collective $326 billion burden, and deliver it in a “timely and orderly” way.
Within minutes that same day, a prime candidate emerged for the new mechanism known as the Common Framework: Zambia missed a eurobond payment, the first African nation to succumb to the pandemic’s economic ravages and default on its debts.
Two years later, as G-20 finance ministers gather this week in India, the agreement once touted as historic looks increasingly fragile, with debt relief emerging as yet another front in an increasingly bitter geopolitical tussle between the US and China.
Efforts to negotiate sovereign-debt restructurings in developing countries like Zambia and Sri Lanka have stalled as Washington and Beijing disagree on the way forward, leaving those economies in a destructive limbo.
Watching nervously are private-sector bondholders including behemoths like Blackrock and Allianz, whose negotiations with debtor nations hinge on public-sector creditors resolving their differences and who see more debt distress to come.
“We’ve got a super-tough situation that puts a lot of question marks over debt sustainability,” said Sonja Gibbs, managing director of the Institute of International Finance, which represents private-sector creditors and other financial institutions. “Writ large, you have rising rates, you’ve got inflation, you have far higher debt levels than you had a decade ago. It’s like a perfect storm for many of these countries.”
If G-20 finance ministers this week are able to break the deadlock, it could unlock restructurings in Sri Lanka and Zambia — helping to speed up the deployment of billions of dollars in International Monetary Fund aid — and renew hope for those starting in countries like Ghana and anticipated in places like nuclear-armed Pakistan.
Most importantly, perhaps, it would provide evidence that China and the US can cooperate on global challenges and spare other countries from the economic crossfire of their growing competition.
Failure, however, risks leading to an ad-hoc system in which creditors compete against each other to strike individual deals with indebted countries, said Carmen Reinhart, a former World Bank chief economist and Harvard University professor. That would only weaken already-fragile economies, lead to destabilizing humanitarian crises and send new waves of migration out of distressed countries.
“The bottom line is we could have another lost decade for many countries,” Reinhart said.
Nowhere has the China-US dissonance been louder than in Zambia, where President Hakainde Hichilema last week likened the country’s $13 billion debt woes to a “black mamba kiss of death.” An ex-trade minister and Hichilema’s former campaign manager, Dipak Patel, bemoans a “Common Framework Cold War.”
“Zambia is just a pawn in the global cold war with China,” Patel said.
Creditors are yet to agree on how to restructure Zambia’s debts, or even on which loans to include, leaving uncertainty hanging over an IMF rescue.
At the center of the standoffs in Zambia and Sri Lanka are Chinese demands that loans made by the World Bank and other multilateral lenders be included in any restructuring. That’s partly driven by a Chinese view of those institutions as proxies for US power.
But the US and World Bank have rejected the idea, arguing any “haircut” would undermine those bodies’ ability to respond to crises and make concessional loans.
Under the system agreed at the 1944 Bretton Woods conference, the World Bank and IMF are traditionally granted seniority in restructurings as lenders of last resort, which relies on their ability to raise low-cost capital to loan at below-market rates.
Chinese banks are also holding to a longstanding reluctance to reduce the principal of loans, preferring to extend their duration and offer temporary payment holidays. The US and others have argued this amounts to simply delaying necessary pain.
US Treasury Secretary Janet Yellen, who discussed the debt issue with China’s outgoing Vice Premier Liu He in January, said earlier this month that China is holding up narrow debt negotiations in places like Zambia and Sri Lanka over broader debates about the US-led global financial system.
“China’s lack of willingness to comprehensively participate and to move in a timely way has really been a roadblock,” she said.
China has fired back that it’s already offering relief and simply asking for the US and other western powers to do their part.
The brewing stalemate has led to a scramble to save the G-20’s framework, led by IMF Managing Director Kristalina Georgieva, outgoing World Bank President David Malpass and Finance Minister Nirmala Sitharaman of India, which is presiding over the G-20 this year.
They’re convening a “debt roundtable” that’s scheduled to bring together ministers for the first time on Saturday, on the sidelines of the G-20 meeting. The goal is to draw in private-sector creditors and interested governments.
The problem confronting participants is that the G-20 originally agreed only on vague contours for restructurings, said Martin Mühleisen, who helped negotiate the initial agreement when at the IMF. Now, they have to fill in all-important details with a recalcitrant China.
“A key objective here is to bring China into the conversation to try to work out a process we can all live with,” said the IIF’s Gibbs.
For decades, the Paris Club of rich sovereign creditors has led the work of dealing with impoverished nations’ debt woes. The G-20’s Common Framework was meant to expand that by bringing in China — now the world’s largest bilateral lender to developing nations — and other new creditor countries like India and Saudi Arabia.
Many of China’s loans to developing nations were through President Xi Jinping’s Belt and Road Initiative to fund projects throughout the developing world. Part of the problem now, according to people close to the talks, is that there’s nobody to take a decision on resolving the problems facing Chinese lenders.
For bank executives who approved the troubled loans, “a writedown would amount to admitting a mistake, adding a black mark on their careers,” analysts at consultancy Teneo wrote in a note.
One hope for this week’s G-20 meeting is that a new endorsement of the debt framework by China’s finance ministry might provide cover for those bank executives.
For now, China’s Export-Import Bank is representing the creditor in discussions with both Sri Lanka and Zambia. Neither the bank nor the People’s Bank of China, the central bank, responded to requests for comment on the G-20 roundtable.
Experts and people close to the talks see the potential for compromises including a ramping up in World Bank aid to indebted countries via a special trust fund. Others are pushing for the IMF to back something more radical such as excluding a reluctant China from an initial restructuring to unlock IMF aid.
While China’s position on including World Bank loans in any restructuring is anathema to the US, the institution’s biggest shareholder, the idea has gained traction elsewhere.
“The World Bank’s preferred-creditor status is a custom, but it is not backed by any international law,” said Deborah Brautigam, director of the China Africa Research Initiative at Johns Hopkins University. More than 40% of the debt in the 73 countries eligible for the Common Framework are held by multilateral lenders, a chunk that’s too big too ignore, she said.
Private-sector creditors have sympathy for China’s position, said IIF’s Gibbs.
“There’s definitely a sense of ‘How do we ensure the best level playing field’” for all creditors, she said, when excluding the World Bank means a bigger burden for others.
Meanwhile, Washington’s increasingly hardline on China is a challenge.
Whereas US and Chinese officials in the past often met at multiple levels to hash out differences on specific areas, those days of granular engagement are gone, said Scott Morris, a former US Treasury official now at the Center for Global Development. “There really isn’t a desire to engage in that way,” he said.
The increasingly aggressive nature of US economic policy toward China has also reduced any leverage Washington once had with Beijing, said Mark Sobel, a former US representative on the IMF board who’s now US chairman of the Official Monetary and Financial Institutions Forum. It’s no longer the case that a stern word from a US Treasury secretary might yield action from Chinese officials, Sobel said.
That, Sobel argues, means it’s time for the IMF to take a more forceful stand against China, or use loopholes in its rules to push forward aid programs without waiting for a debt-talks resolution.
One way or the other, “the fund really needs to find a megaphone,” Sobel said. “Quiet diplomacy doesn’t seem to be working.”
--With assistance from Alonso Soto and Ronojoy Mazumdar.
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