Committee for the Abolition of Illegitimate Debt

Both public and private actors that borrowed heavily in recent years are finding it increasingly hard and costly to refinance their sky-high debt stocks. The number of countries at high risk of debt distress is increasing. In this overview of 2019, we look at the key crises that are threatening economies around the globe, and which countries are likely to be hit hardest…

An end to quantitative easing in Europe

The European Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx (ECB ECB
European Central Bank The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.

https://www.ecb.europa.eu/ecb/html/index.en.html ) terminated its net asset purchase programmes in December. Through these programmes, the ECB had helped Eurozone countries to issue and refinance debts at low 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. since 2015. As a result, the ECB became the largest creditor in the EU, holding more than €2 trillion in government bonds. Despite the ECB’s announced it would keep 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. rates low at zero per cent, the end of net 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). purchases marks the end of quantitative easing in Europe.

This policy shift comes at an awkward time as Gross Domestic Product 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. (GDP) growth in the EU dropped dramatically to just 0.3 per cent in the penultimate quarter of 2018. Major economies like Italy and even Germany showed negative growth. Moreover, shocks through a hard Brexit, Trump-style trade wars, a waning China boom and other factors are likely to hit Europe hard in 2019. The shift in ECB policy has implications for financing conditions outside Europe too, as the liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. created by the ECB’s quantitative easing programmes had also made borrowing elsewhere easier and cheaper.

Cost of dollar debt rising

The USA is several steps ahead when it comes to ending quantitative easing. The US Federal Reserve Bank (Fed) raised interest rates in December to 2.5 per cent, the ninth such move since late 2015. Dollar debt has thus become expensive, which is particularly problematic for public and private debtors in developing countries that took out dollar-denominated loans when they were still cheap and easy to find. This is no longer the case and, according to the Fed FED
Federal Reserve Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/ ’s announcements, 2019 will see at least two more interest rate hikes.

Jubilee Debt Campaign UK recently found that yields on low and lower middle-income government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. increased by an average of 2.2 percentage points over the course of 2018 – reaching a staggering annualised rate of 8 per cent by the turn of the year. 2019 will likely see several developing countries default or – if they don’t – amassing higher debt servicing costs that represent a massive diversion of scarce public resources for the benefit of creditors and to the detriment of development spending and public service provision.

Global debt has reached record highs and is growing further

When the last global financial crisis hit, the total debt of advanced economies had reached ‘only’ 233 per cent of GDP. By the end of 2017, this figure was 269 per cent. Even more drastic was the increase in emerging economies, where total debt surged from 113 per cent in 2007 to 176 per cent of GDP in 2017, according to data from the Bank for International Settlements. Particularly worrying is the drastic rise of corporate debt in both rich and not-so-rich countries, but particularly in China.

Countries to watch

While the risk of crises is generally increasing, some countries face particular challenges. According to 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.

http://imf.org debt sustainability assessments, 32 low-income countries were in debt crises or at high risk of crisis by the end 2018. Newcomers to the list include Republic of Congo, Ethiopia and Sierra Leone. The troubles in Argentina, Pakistan and Turkey were the first signs of the upcoming emerging markets crisis caused by overlending of private or official lenders.

Here are some more countries to watch in 2019:

• Angola: Public sector debt reached 81 per cent of GDP by the end of 2018, according to the rating agency Rating agency
  Rating agencies Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).
  
  Moody’s : https://www.fitchratings.com/ Fitch. The International Monetary Fund (IMF) already approved a $3.7 billion three-year bailout loan. Angola is one example among many oil exporting nations affected by the drop in oil prices.
• Pakistan: Country coffers need approximately $12 billion for balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. support by the end of June. Pakistan already secured $6 billion from Saudi Arabia and almost the same amount from China and the United Arab Emirates together. It is still negotiating with the IMF for more money, but is unwilling to bow to IMF’s conditions, according to the Committee for the Abolition of Illegitimate Debt (CADTM) in Pakistan. China has lent massively to Pakistan to finance projects under the Belt-and-Road-Initiative. Multilateral development banks are also high on the creditor list.
• Sri Lanka: The island nation is a struggling with a crisis caused by Chinese infrastructure loans, which added to an already large stock of debt from private sources, in combination with massive capital outflows. New measures to cope with volatility include restricting foreign ownership of debt, says Reuters.
• Ukraine: As the conflict continues, Ukraine has just signed a new Stand-By Agreement with the IMF and continues to be by far the largest recipient of Macrofinancial Assistance from the EU.
• South Africa: Faces a $170 billion foreign debt cliff and already pays a staggering 9 per cent 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. on 10-year-bonds to attract investors, according to Professor Patrick Bond.
• Venezuela: Has already defaulted on a number of bonds and faces litigation by vulture funds. It can hardly restructure old debts while still under US sanctions that prevent foreign creditors from taking on new bonds.
• Cuba: Following the lead of Venezuela and Mozambique, Cuba made the incoming Brazilian President a welcome gift by defaulting on loans due to Brazil’s national development bank.
• Gambia: Also trying to restructure unsustainable and illegitimate debts, Gambia has just hired the Potomac group to help the country out of a debt crises that occurred when the previous president plundered state-owned enterprises.
• China: The elephant in the room, total debt in China has more than quadrupled since 2007, rising to 317 per cent of GDP. Corporate debt accounts for more than half of this, standing at 170 per cent of GDP in 2015. This is more than double the average ratio in advanced economies, according to an analysis by the CADTM.
• Italy: The EU’s very own elephant in the room is Italy. Risk premiums on Italian bonds have fallen substantially since November, but everyone wonders how the end of quantitative easing and potentially rising interest rates might impact on Italy’s debt sustainability.
• Uganda: An interesting case as it proves that debts can cause humanitarian crises. While rated at ‘low risk of debt distress’ by the IMF, the Ugandan government will have to use more than half of government revenues in the coming years to pay debts, according to the Auditor General.

With so many crises ongoing and more expected to emerge, it is no surprise that the topic is high up the agenda of international organisations for 2019. The global policy-making calendar offers a number of opportunities to take bold steps that could turn the tide and stop these potential crises from escalating any further.

Read our next blog to find out more about key moments on the 2019 calendar.