The submerging market debt crisis

4 April 2022 by Michael Roberts

“IMF protest” by rhwalker22 is marked with CC BY 2.0.

Last week, Ghana’s central bank announced its biggest ever interest-rate hike as it sought to slow rampant inflation that threatens to create a debt crisis in one of West Africa’s largest economies. The Bank of Ghana raised its main lending rate by 250 basis points to 17% as consumer inflation reached 15.7% year-on-year in February, the highest since 2016. The war in Ukraine will likely make things worse. Ghana imports nearly a quarter of its wheat from Russia and around 60% of its iron ore from Ukraine.

Ghana is just one example of the economic stress being placed on small, low-income economies around the world from food and energy inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. , rising interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
and a strong dollar. The island nation on the southeast coast of India, Sri Lanka, has begun talks with the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
for a ‘debt relief’ package after protests over a deepening economic crisis forced Gotabaya Rajapaksa’s government into a policy U-turn. Sri Lanka has for months faced mounting economic pain as its depleted foreign currency reserves triggered shortages of imports and fuel, power blackouts and double-digit inflation. It has debt and interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. repayments worth about $7bn due this year against usable foreign currency reserves as low as $500mn.

Sri Lanka is Asia’s largest high-yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. issuer, borrowing heavily in the years following the end of its 2009 civil war. It has never defaulted. But it looked set to do so before it turned to the IMF. About one-third of its debts are owed to international bondholders while other large creditors include countries such as China and India. It is expected to finalise a $1bn credit line with India. And even with IMF money, it will probably have to default and ‘restructure’ its debts with creditors.

In doing so, Sri Lanka will join countries such as Suriname, Belize, Zambia and Ecuador that have already defaulted on their debts during the pandemic. Pakistan too is on the brink of default, with its government under Imran Khan forced into calling elections.

Egypt has also asked for support from the IMF, as the country struggles to weather the economic impact of Russia’s invasion on Ukraine. Egypt is the Arab world’s most populous nation and has ‘benefited’ from previous IMF loans and programmes. In 2016 it secured a $12bn loan over three years after a crippling foreign currency crisis as it emerged from the political upheavals that followed its 2011 revolution. It also received $8bn in 2020 to deal with the impact of the pandemic, making it one of the biggest borrowers from the IMF after Argentina. At the time of the 2016 agreement, it devalued the currency, which lost half its value against the dollar. Foreign debt investors have also pulled billions of dollars from Egypt in recent months, adding to pressure on its currency.

I’ve raised this before, and both the IMF and the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

have warned, many countries are emerging from the COVID pandemic slump with a large debt overhang that could cripple their economies if they are forced by creditors, both private and public, to repay. And while many of these countries are small in GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
size, they are huge in population. The IMF’s debt database shows that the external debt stock Debt stock The total amount of debt of low- and middle-income countries in 2020 rose, on average, 5.6 per cent to $8.7 trillion. However, for many countries, the increase was in double digits. The external debt stock of countries eligible for the Group of Twenty (G-20) Debt Service Debt service The sum of the interests and the amortization of the capital borrowed. Suspension Initiative (DSSI) rose, on average, 12 per cent to $860 billion and in some of them by 20 per cent or more. And that debt initiative, which just suspends payments on debts for a few years, has now come to an end.

The combined debt service paid by DSSI-eligible countries in 2020 on external public and publicly guaranteed debt, including the IMF, totalled $45.2 billion, of which principal accounted for $31.1 billion and interest for $14.1 billion. The 2020 debt service comprised $26.4 billion (58 per cent) paid to official bilateral and multilateral credi­tors and $18.8 billion (42 per cent) to private creditors, that is, bondholders, commercial banks, and other private entities. Many small countries have external debt levels well above 100% of annual GDP.

Prior to the start of the Russian invasion of Ukraine, the impact of the pandemic on low-income countries’ public spending and revenues had produced an increase in their gross sovereign borrowing equivalent to about 25 per cent of their GDP.

Capital flows to the poorer countries of the world by the imperialist core have been falling since the end of the Great Recession, another indicator of the decline in globalisation. In 2011, $1.3trn went into the ‘Global South’ from the Global North. In 2020, that annual figure had fallen to $900bn, a 30% fall. And remember that over half of all financial flows to the Global South go to China. Excluding China, the fall in capital flows to the poorest countries is even greater. Over the past decade, almost 60 per cent of net aggregate financial flows to low- and middle-income countries from external creditors and investors went to China. Over this period China received inflows of close to $4 trillion, of which 40 per cent were debt-creating flows and 60 per cent were foreign direct investment and portfolio equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. flows. In 2020, aggregate financial flows to China rose 32 per cent to $466 billion, driven by a 62 per cent increase in net debt inflows to $233 billion and a 12 per cent rise in net equity inflows also to $233 billion.

Private creditors (investment funds Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
etc) have cut back on their investment in the government and corporate bonds Corporate bonds Securities issued by corporations in order to raise funds on the Money Markets. These bonds resemble government bonds but are considered to be more risky than government bonds and other guaranteed securities such as Mortgage Backed Securities, and therefore pay higher interest rates. of poor countries and international banks have stopped lending. Much of the capital flows into these poor countries was not even for productive investment but merely to cover previous debts or for speculation by foreign investors in local financial markets. Foreign direct investment (FDI) has fallen from $600bn in 2011 (or about 40% of all capital flows) to $434bn in 2020. You might argue that financial investments by foreign multinationals and investment speculators are the last thing these countries need. But if foreign capitalists are reducing their investments, what is to replace them, either for productive investment in these poor economies or just to cover existing debt repayments? The answer is IMF-World Bank money with all sorts of conditions, and increased remittances by those who left their countries and got jobs and incomes working abroad. For all the data – see the table below.

One controversial issue in capital flows to the Global South is the role of China. China has become an important creditor to many poor countries, starved of funds by the ‘West’ and desperate for credit to cover existing debts and to carry out infrastructure and productive projects. Low- and middle-income countries’ combined debt to China was $170 billion at end-2020, more than three times the comparable level in 2011. To put this figure in context, low- and middle-income countries’ combined obligations to the International Bank for Reconstruction and Development were $204 billion at the end-2020 and to the International Development Association $177 billion. Most of the debt owed to China relates to large infrastructure projects and operations in the extractive industries. Countries in Sub-Saharan Africa, led by Angola, have seen one of the sharpest rises in debt to China although the pace of accumulation has slowed since 2018. The region accounted for 45 per cent of end-2020 obligations to China. In South Asia, debt to China has risen, from $4.7 billion in 2011 to $36.3 billion in 2020, and China is now the largest bilateral creditor to the Maldives, Pakistan, and Sri Lanka.

Some argue that this shows China is just as ‘imperialist’ as the West and that China is putting poor countries into a permanent ‘debt trap’. But the evidence for this is weak. Most Chinese credits are on no worse terms than that offered by the IMF and other bilateral creditors, and in many cases are much better. China is supposed to use ‘debt diplomacy’ against the interests of debtor nations. But debt diplomacy is actually used by the West more, as the examples of Argentina and Ukraine show.

In sum, debts to foreign investors and financial institutions owned by the Global South have accelerated during the COVID pandemic and ‘debt relief’ has been no such thing. Now the Ukraine conflict is increasing the risk of defaults and economic recession for these countries as inflation spirals, interest rates rise and economic growth falls away.

Net transfers of financial resources from developing to developed countries far exceed any compensation by net overseas development aid (ODA ODA
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
) flows to developing countries, which averaged less than $100bn a year In 2012, the last year of recorded data, developing countries received a total of $1.3tn, including all aid, investment, and income from abroad. But that same year some $3.3tn flowed out of them. In other words, developing countries sent $2tn more to the rest of the world than they received. If we look at all years since 1980, these net outflows add up to an eye-popping total of $16.3tn.

What’s the answer? Well, the obvious global one is to cancel the debts owed by all these poor countries. Based on the amount their governments are spending on debt payments that leave the country, the Jubilee Debt Campaign estimates that people in 54 countries are currently living in debt crisis, up from 31 in 2018 and 22 in 2015. As well as the 54 countries in debt crisis, the Jubilee Debt Campaign estimates that 14 countries are at risk of a public or private debt crisis, 22 at risk of just a private sector debt crisis, and 21 just a public sector debt crisis.

Then there are national solutions. First, governments need to put in place capital controls to stop the reckless flow of speculative capital that destroys national currencies and provokes financial crises. Capital controls are also needed to stamp out illicit and criminal capital flows. US-based Global Financial Integrity (GFI) calculates that developing countries have lost a total of $13.4tn through unrecorded capital flight since 1980.

Even the IMF has admitted that capital controls should be a weapon available to a national government to protect its financial assets and household savings from asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). stripping and rich individual and corporation capital flight. The IMF now says that countries should have “more flexibility to introduce measures that fall within the intersection of two categories of tools: capital flow management measures (CFMs) and macroprudential measures (MPMs)”. And controls could be “applied pre-emptively, even when there is no surge in capital inflows, to the policy toolkit.”

Ultimately, the only way poor countries can reduce their exploitation by multinationals and international finance is through state control of the banking and strategic sectors of their economies. That, of course, is anathema to international capital.https://thenextrecession.wordpress....

Source: Michael Roberts blog.

Michael Roberts

worked in the City of London as an economist for over 40 years. He has closely observed the machinations of global capitalism from within the dragon’s den. At the same time, he was a political activist in the labour movement for decades. Since retiring, he has written several books. The Great Recession – a Marxist view (2009); The Long Depression (2016); Marx 200: a review of Marx’s economics (2018): and jointly with Guglielmo Carchedi as editors of World in Crisis (2018). He has published numerous papers in various academic economic journals and articles in leftist publications.
He blogs at

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