Developing Country Debt: The Accelerating Crisis and the Search for a New Resolution Mechanism

The podcast episode "Developing Country Debt: What's Next" from NewEconomicThinking delves into the escalating sovereign debt crisis facing developing countries and emerging economies, exacerbated significantly by the COVID-19 pandemic. Experts Sarah Jane Clifton, Philippa Ziegler Blackner, and Mitu Gulati discuss how a pre-existing condition of over-indebtedness, characterized by rising debt levels since 2011 and many countries spending more on debt servicing than healthcare, was pushed to the brink by the pandemic's economic shocks. These shocks include dramatic growth rate reductions, increased debt stocks, commodity price crashes, tourism collapse, remittance declines, and massive capital outflows, all while developing nations lacked the fiscal tools available to richer countries.

A central theme is the inadequacy of current policy responses, such as the IMF's emergency finance and the G20's Debt Service Suspension Initiative (DSSI). Critics argue that the DSSI merely suspends rather than cancels debt, "kicking the can down the road" and creating a larger crisis later. Furthermore, it fails to cover debt owed to multilateral institutions and, crucially, private lenders, effectively bailing out private creditors who lent at high interest rates. The speakers highlight the significant disincentive for countries to request suspension due to "scaremongering" about access to future private markets, and the structural power imbalance favoring private lenders.

The discussion underscores the critical absence of an effective, multi-national mechanism to deal with a synchronized, widespread debt crisis involving dozens of countries simultaneously. Mitu Gulati emphasizes the need for a temporary mechanism to "buy us time" to design a more permanent solution, noting the historical blocking of UN-led sovereign debt workout mechanisms by countries like the US and UK due to their financial sector's vested interests. Philippa Ziegler Blackner adds the perspective of developed country finance ministries, which are currently overwhelmed by domestic crises, limiting their capacity and willingness to engage in complex international debt solutions, and highlighting the tactical considerations of precedent and burden-sharing, particularly with China.

Practical insights include the urgent need for debt cancellation, not just suspension, and the importance of a new definition of "sustainable debt" that prioritizes a country's ability to provide basic services and human rights over mere default risk. The experts also touch upon the challenges of engaging China as a major creditor and the fear developing countries have of private creditors and legal action, often under English or New York law. The episode concludes with a call for international cooperation to establish a fair and orderly debt resolution process, acknowledging the deep-seated political and economic obstacles that have historically prevented such mechanisms from being implemented.

"Much of the developing world and particularly the emerging market world that borrows from the private markets and were focused on private debt was on the brink of or clearly so over-indebted before the covet crisis hit."

"We were already in bad shape but our assumption had been we would have sovereign defaults occur one by one and we had techniques to deal with them one by one... but we had and have no technique to deal with the kind of situation where dozens of countries go into crisis at the same time."

"The pandemic has essentially it's dramatically accelerated and deepened this debt crisis which was on the horizon."

"We published some research just before covered hit in January showing that already there were 64 developing countries that were spending more on their debt payments than on health care."

"The biggest issue with the g20 scheme is that it's suspending debt payments it's not cancelling them so really it's just kicking the can down the road for a much bigger crisis in a couple of years time."

"From our point of view the biggest problem of all is it doesn't cover the debts owed to private lenders... all of this debt relief and action that we've seen from the imf and g20 has effectively been used to kind of bail out private lenders."

"We need debt cancellation if we are to avert a whole series of incredibly messy and destructive debt defaults."

"The absence of a pre-existing well-functioning mechanism for this kind of situation is really what a lot of people found very very tricky."

"Argentina has led discussions in the un for a sovereign debt workout mechanism and those discussions have advanced quite far but have been systematically blocked by... the uk and the us."

"What matters is whether your country has enough money to be able to deliver on the basic economic and social rights of citizens."