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Patricia Cohen
Last week’s Vatican meeting on the global debt crisis was not as celebrity-filled as the one 25 years ago chaired by Pope John Paul II, who wore sunglasses given to him by U2 frontman Bono.
But the message from the current pope, Francis, this time — not to rock stars but to a room full of bankers and economists — was the same: The world’s poorest countries are being crushed by unmanageable debt, and rich countries need to do more to help.
Emerging countries are facing a public debt of up to $29 trillion. According to the latest report of the United Nations Conference on Trade and Development, interest payments in 15 countries exceed education expenditures; and debt payments in 46 countries exceed health care expenditures.
Unmanageable debt is a familiar feature of the modern global economy, but the current wave may be the worst yet. Overall, global government debt is four times higher than it was in 2000.
Excessive or mismanaged government spending is one reason, but global events beyond most countries’ control have saddled them with debt problems. The coronavirus pandemic has slashed corporate profits and workers’ incomes, while health care and relief costs are rising. Violent conflict in Ukraine and elsewhere has led to higher energy and food prices. Central banks are raising interest rates to combat surging inflation. Global economic growth has slowed.
Pope Francis has called for a reform of the global financial system in addition to loan relief. “Let us imagine a new, bold and creative international financial architecture,” he said last week.
Many economists and policymakers have come to believe that the mechanisms and institutions, including the IMF, created 80 years ago to respond to countries in financial crises are no longer up to the task.
It’s like a great TV repairman who knows how to replace a cathode ray tube but doesn’t know how to replace a circuit board. World Bank Chief Economist Indermit Gill made a similar point this week when the bank released its latest global economic report, which warned of the severe impact of debt at a time of slowing growth.
Debt relief “is the weakest part of the global financial architecture,” Gill said, adding that changes in lending “require a new debt restructuring framework, which we don’t have yet.”
As friction between China and the United States intensifies, resolving the debt crisis becomes increasingly difficult. Moreover, there is currently no international arbitration institution that has authority over all creditors, equivalent to a bankruptcy court, that can adjudicate disputes.
Funding from institutions such as the International Monetary Fund has also failed to keep pace with the size of the global economy or the increase in debt burdens.
Former Argentine Finance Minister Martín Guzman, who also experienced the devastating effects of Argentina’s debt crisis firsthand and attended the Vatican meeting last week, believes that IMF help can sometimes backfire, offering rescue loans at high interest rates that ultimately only add to a country’s already heavy debt burden.
He also sharply criticized the fund for imposing additional fees, or surcharges, on distressed, high-risk debtors, diverting precious funds that could be used to provide health care and rebuild the economy.
Last year, the five largest borrowers — Ukraine, Egypt, Argentina, Ecuador and Pakistan — incurred $2 billion in surcharges alone, according to the Center for Economic Policy Research. On average, the surcharges ultimately raised borrowing costs by nearly 50% for all affected countries.
Currently, debt-ridden countries are experiencing slow economic growth and a bleak outlook. Emerging countries have no money to pay for critical education, infrastructure, technology and healthcare. According to the International Monetary Fund, about 60% of low-income countries are in debt distress or at high risk.
Meanwhile, trillions of dollars in additional funding will be needed to protect these vulnerable countries from extreme weather and enable them to meet international climate goals. Returning from the Vatican meeting, former World Bank chief economist Joseph Stiglitz said that during the Jubilee debt campaign in 2000, “there was optimism that we had learned our lessons” and that debt relief programs would “solve future problems.”
“Apparently not,” he said. “The problem is much bigger than we thought 25 years ago.” — The New York Times
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