22 February 2021

Provided that it is legitimate and invested in productive sectors that are essential or useful to the population, debt in itself is not a bad thing. However countries most often fall into the debt trap. When faced with the rising debt of DC, advocates of the dominant economic policy generally claim that the sums borrowed are going to be invested in the economy, generate growth and jobs, improve infrastructure, increase GDP and in fine produce the wealth necessary to repay the debt alongside higher income. The truth is that this interpretation ignores the differential between the amounts borrowed and the amounts actually received after the generous commissions and fees creamed off by the creditors, and also interest rates. It ignores embezzlement of public money, enabled by banking secrecy ensured and defended by big private banks with the support of governments and institutions such as the World Bank, the IMF, the OECD, multilateral regional banks like the Inter-American development banks, the African Development Bank, the Asian Development Bank, the European Investment Bank and so on. It ignores the trade mechanisms and agreements on foreign investment that impoverish States and their populations: free-trade treaties, bilateral treaties on investments, repatriating profits by multinationals, etc. That interpretation also ignores exogenous shocks that severely limit governments’ ability to defend their populations if they are to continue debt repayments: the catastrophic effects of the global environmental crisis, the global health crisis, the global economic crisis. Those who are eager to explain that public indebtedness is a compulsory step for the countries of the South if they want to progress and develop forget to consider the fact that DC are particularly vulnerable to these exogenous factors. No developing country, with the exception of China – which is not really a DC except in the statistics of the World Bank and other international bodies—has the power to make a significant impact on variables like international interest rates, the exchange rate for their national currency against strong currencies, the price of raw materials (or what is known as terms of trade), the great flows of investments, decisions made by multilateral institutions (the IMF, World Bank, WTO etc.). Whenever there is a shock on one or more of these variables, DC can soon find themselves suffocating or at least considerably destabilized.

1. Evolution of the public external debt of DC by type of lender

Graph 1: Evolution of the public external debt of DC by type of lender (in billions of $US)

In the graph above, can be seen the two phases described earlier. Furthermore, the lenders can be distinguished, divided into 4 categories:

• In blue: bilateral creditors. These are loans between States.
• In yellow: multilateral creditors. These are loans from the international financial institutions (IMF, World Bank and the development banks).
• In grey: IMF’s loans [1].
• In green: private creditors. A distinction is made between: dark green, for loans contracted on the financial markets in the form of sovereign bonds, usually sold on Wall Street; khaki green, for bank loans; and light green for loans from other kinds of private creditor.

In short:

in billions of USD	2000		2010		2019
	Amount	As %	Amount	As %	Amount	As %
Bilateral part	418.84	31.65	347.72	20.01	439.3	13.43
Multilateral part	318.19	24.05	469.91	27.04	691.13	21.13
IMF part	77.6	5.86	135.26	7.78	170.29	5.21
Bondholders part	320.05	24,19	505,65	29.10	1527.5	46.70
Owned to private bank	122.55	9.26	244.18	14.05	368.3	11.26
Owned to other private creditors	66.01	4.99	35.12	2.02	74.24	2.27
Total	1323.24	100	1737.84	100	3270.76	100

While the official bilateral and multilateral creditors hold a roughly stable amount of the DC’s debt in absolute terms, there has been a significant increase of the share held by private creditors, which has climbed from 38% in 2000 to 60% in 2019. Although it is true that bank loans have increased, this tendency is mainly due to the weight of bond issues, i.e. sovereign bonds sold by the DC on the financial markets, mainly Wall Street).

Unlike loans from official creditors, private loans have the advantage of not carrying political conditionalities. On the other hand, interest rates are higher and may vary according to the credit rating given by Credit Rating Agencies or the evolution of the benchmark interest rates fixed by central banks.

2. Evolution of interest rates

Graph 2: Evolution of the Prime Rate and the main Central Banks (in %)

• The Prime rate, here in blue, is the interbanking rate practised by banks for short-term loans they make one another. It is usually 3 points higher than the FED rate.
• In orange are the interest rates fixed by the US Federal reserve;
• in grey, those fixed by the European Central Bank; and
• in yellow, by the Japanese Central Bank.

The US dollar, the euro and the yen are the main 3 lending currencies.

In 1979, the FED’s brutal interest rates applied after a unilateral decision by the United States was one of the main factors that triggered the debt crisis in the Third World. Following the subprime crisis in 2007-2008, the Central Banks of Europe and the United States applied a very low interest rate. They have pursued this policy without ever really succeeding in improving the economic situation. With the new financial disturbances of Autumn 2019 and the collateral effects of Covid-19, it should be extended, but for how long? If rates were to rise, the cost of debt repayment would increase significantly for the DC. The risk is enhanced by the currency profile of the DC’s debt. 75 % are denominated in US dollars, 9 % in euros, 4.4 % in yen (see graph 3).

Graph 3: Evolution of the composition of the DC’s public external debt by currency (in %)

This graph shows only the main exchange currencies as indicated by the World Bank. In blue we have the US dollar, in green the IMF’s Special Drawing Rights (SDR – a basket of currencies), in grey the Japanese yen, in yellow the euro and in red “all other currencies”. To make the graph clearer and because their proportion is below 1 %, we have omitted to show the Swiss franc (0.38%), the British pound sterling (0.27%) and “miscellaneous currencies” (0.53%).

It is immediately obvious that by far the majority of loans are contracted in US dollars (80.5%). Next come, in yellow, loans denominated in euros (8.5%), loans denominated in yens (4.33%), then in red, “all other currencies” (3.97%). The latter is rising sharply, probably because it rests to a large extent on the yuan, the currency of the State of China, which has become one of the largest lenders to the DC.

Graph 4: Evolution of interest rates on the DC’s loans (in %)

The graph represents the average interest rates paid by the DC. In grey are those owed to private creditors, in orange those owed to official creditors and in blue, the average of both those.

As shown in Part 2, we note a fall in interest rates consecutive to decisions of the Fed and the ECB, with a subsequent rise from 2013 onward. The upward inflexion gets noticeably steeper from 2018 onward. While lower than before, the level of interest rates has thus gradually increased. At their lowest between 2013 and 2015, they reached an average of 3%; from 2015 they climbed by an average of 4%. Afterwards, the increase was much steeper. By way of comparison, in 2019-2020 countries like France, Germany, Japan or the United States borrowed at either negative interest rates or at a rate varying between 0 and 1%.

An important fact that this graph highlights is a rise in interest rates from 2015. The overall increase in the DC’s debt, their weak credit ratings on the financial markets, in correlation with the end of the super cycle of raw materials and the slowdown in world growth during the trade war between the USA and China, lead creditors to fear a series of defaults on repayments in 2020. Consequently, the lenders “protect” themselves by raising the risk premium that they demand from borrowers from the South. This trend is particularly noticeable over the last two years. When the average interest rate was 4.22% in 2018, it had more than doubled in 2019 (9.35%). Private creditors speculate on future defaulting.

Is a new debt crisis in motion? Is the debt trap closing on the DC? Several factors are developing in that direction; this is what we are about to see.

3. Evolution of exchange rates for DC currencies

To calculate the cost of loans an economy takes out, it is not enough to take into account the interest rates (and risk premiums which make the loans even more expensive); how the value of the debtor country’s currency evolves in relation to the currency in which the loan is denominated also needs to be included. If a country borrows mainly in dollars and its own currency loses, say, 5 % of its value compared to the dollar, the burden of debt repayment will automatically increase. Now most countries of the South have seen their currency depreciate against the dollar during 2020. The ratio varies between 2.7 (Tunisian dinar) and 10,470 (Uzbek som) to 1USD. In the case of Venezuela, the ratio even reaches 1,035,256.1, i.e. over one million of Venezuelan bolivars for 1USD.

Table 2: Evolution of exchange rates for 38 DC currencies against the US dollar between 1 March 2020 and 1 January 2021  [2]

Currecny	Variation (%)	Value on 1 March 2020	Value on 1 January 2021
HTG Haïti [Gourde]	21.6 %	88.3	72.6
LRD Liberia [Liberian dollar]	20.6 %	196.6	163
EUR Euro zibe [Euro]	11.8 %	0.9	0.8
CNY China [Yuan renmimbi (RMB)]	6.8 %	6.9	6.5
ZAR South Africa [Rand]	6.0 %	15.6	14.7
PHP Philippines [Peso philippin]	5.9 %	51.1	48.2
Tunisie [Tunisian Dinar]	5.7%	2.8	2.7
LBP Lebanon [Lebanon Livre]	0.0 %	1507.5	1507.5
EGP Egypt [Egyptian Livre]	-0.7 %	15.6	15.7
MXN Mexico [Mexican Peson]	-0.9 %	19.7	19.9
SDG Sudan [Sudanese Livre]	-0.9 %	54.7	55.2
INR India [Indian Roupie]	-1.2 %	72.2	73.1
NPR Nepal [Nepalese Roupie]	-1.2 %	115.4	116.8
GMD Gambia [Gambian Dalasi]	-1.5 %	50.9	51.7
AFN Afghanistan [Nouvel afghani]	-1.6 %	75.8	77.0
LKR Sri Lanka [Roupie ]	-1.8 %	181.7	185.1
NIO Nicaragua [Cordoba]	-1.9 %	34.2	34.8
MGA Madagascar [Ariary]	-2.2 %	3720.3	3805.0
BIF Burundi [Burundi Franc]	-2.6 %	1888.4	1939.0
MNT Mongolia [Tugrik]	-3.5 %	2752.5	2852.3
NGN Nigeria [Naira]	-3.7 %	364.0	378.0
PKR Pakistan [Roupie ]	-3.8 %	154.0	160.1
SLL Sierra Leone [Leone]	-3.9 %	9704.4	10100.5
JMD Jamaïque [Jamaican Dollar]	-4.1 %	137.1	142.9
LAK Laos [Kip laotien]	-4.1 %	8902.6	9288.9
GNF Guinea [Guinean Francn]	-4.7 %	9520.4	9988.4
MWK Malawi [Kwacha malawite]	-4.7 %	727.1	763.2
PEN Peru [Sol]	-5.1 %	3.4	3.6
RWF Rwanda [Rwanda Franc]	-5.4 %	936.7	990.4
PYG Paraguay [Guarani]	-5.7 %	6517.6	6912.2
CRC Costa Rica [Colon]	-6.7 %	569.1	610.0
KES Kenya [Shilling]	-7.4 %	101.1	109.1
GHS Ghana [Cedi]	-8.1 %	5.3	5.8
DOP Dominican Republic[Peso]	-8.2 %	53.3	58.1
UYU Uruguay [Peso]	-8.5 %	38.6	42.1
DZD Algeria [Dinar]	-9.0 %	120.1	132.1
UZS Uzbekistan [Som]	-9.2 %	9507.1	10470.1
KZT Kazakhstan [Tenge]	-9.4 %	381.5	421.2
RUB Russia [Rouble]	-10.0 %	67.1	74.6
MZN Mozambique [Metical]	-12.9 %	65.2	74.9
UAH Ukraine [Grivna]	-13.2 %	24.6	28.3
BRL Brazil [Real]	-13.6 %	4.5	5.2
CDF Congo/Kinshasa (RDC) [Congolese Franc]	-13.8 %	1694.6	1966.6
TRY Turkey [Lire]	-16.1 %	6.2	7.4
KGS Kirghizistan [Som]	-16.4 %	69.8	83.5
ETB Ethiopia [Bir]	-17.9 %	32.3	39.3
IQD Iraq [Dinar]	-18.5 %	1190.1	1460.0
AOA Angola [Kwanza]	-24.8 %	492.2	654.6
ARS Argentina [Peso]	-26.1 %	62.2	84.0
ZMW Zambia [Kwacha]	-28.8 %	15.1	21.2
SCR Seychelles [Roupie]	-40.5 %	12.4	20.9
SRD Surinam [Dollar]	-46.8 %	7.5	14.0
ZWL Zimbabwe [dollar]	-78.1 %	17.9	81.8
VES Venezuela [Bolivar]	-92.9 %	73617.1	1035256.1

Map: Evolution of the respective values of currencies compared to the UD dollar from 1^st March 2020 and 1^st January 2021  [3]

Map: Evolution of the respective values of currencies compared to the Euro from 1^st March 2020 and 1^st January 2021 [4]

Table 2 and the map above show the evolution of the respective values of 50 DCs and of the world at large compared with the US dollar from 1^st March 2020, the time when the CoViD-19 pandemic became global, and 1^st January 2021 when this text was drafted.

Except for countries of the North, DCs in the eurozone, the 15 countries that are former French colonies in West and Central Africa and in the Comores, countries that indexed their currency on the US dollar (such as Ecuador), and China, we notice that the overwhelming majority of DCs’ currencies depreciated over that period (map 1). The overwhelming majority of DCs’ currencies depreciated over that period. Actually this depreciation had started in 2015. It was accelerated by coronavirus’ collateral economic consequences.

Several factors can explain this evolution:

Clearly, the ruling classes in the South are partly responsible since they have organized the flight of capital. Indeed local ruling classes buy dollars (or some other strong currency) to place ‘their’ money safely in countries of the North or in some tropical tax haven instead of investing it in their country’s economy. Buying dollars with local currencies boost the dollar compared with those currencies. This leads the central bank of the concerned country to try and limit depreciation of the local currency by repurchasing it with dollars it has in reserve. This in turn results in depleting exchange reserves. This is what has happened in Turkey since 2015. It is also what tragically happened in Lebanon in 2020. The diminution of the central bank’s exchange reserves reduces its ability to repay the sovereign debt in dollars or in any other strong currency to the point that the country has to default, either totally or partially. This is also what happened in Argentina and in Lebanon en 2020.

Other actors are responsible for the depreciation of the local currency: for instance, the large foreign corporations that send their profits back to the parent company located in the North or foreign investment funds that resell shares they had bought on the local stock market. Another factor that works against the local currencies is the fall in exports and thus on the amount of dollars brought in by the sale of exported products on the global market.

A further factor can account for this depreciation/devaluation of currencies in the South compared with the dollar, namely the plummeting of commodity prices from 2015 onward (see part 3 of the e series). As they are mainly intended for export, a fall in prices results in a proportional fall in the countries’ revenues, and throw their trade balance into the red (ratio between import and export revenues). Consequently, the foreign currency reserves that are necessary to repay the external debt contract accordingly.

Simultaneously, with depreciations, the amount of local currency that has to be converted into dollars to repay the external debt (or the internal debt if the currency is indexed on the dollar, as is often the case) strongly increases, according to a simple arithmetical mechanism. Indeed, even if interest rates remained at historically low levels (see part 2 [?]), countries would have to dig deeper and deeper in their exchange reserves to repay their debt. Since export revenues are decreasing because of the global economic crisis that was dramatically aggravated by the consequences of Covid-19, the situation has become critical for a number of DCs including so-called emergent countries such as Argentina (-26.1%), Brazil (-13.6 %), India (-1.2%), Mexico (-0.9 %) or Russia (-10.0 %). Several of the concerned countries are already overindebted or have suspended payment.

In the third part, we analyze the evolution of commodity prices, the schedule for debt repayment, and the aggravating factors resulting from the global crisis related to the pandemic.

Translated by Christine Pagnoulle and Vicki Briaut Manus

Footnotes :