A new global debt crisis

China's role as lender has complicated relief efforts

The pandemic has brought in its wake a host of economic crises, which will have to be addressed in order to bring the global economy back to health in the long term. The additional fiscal burden of lockdowns and public health requirements has been especially hard on emerging markets. Some of these have sought to tap global capital markets to make up the difference. Others are already more indebted and are looking for a suspension or even forgiveness of their debt repayments. Yet some have been forced into, or are faced with, sovereign downgrades, which limit their fiscal space to respond adequately to the pandemic. The International Monetary Fund (IMF) has calculated that the pandemic has had a severe effect on debt levels: “Compared to end-2019, average 2021 debt ratios are projected to rise by 20 per cent of GDP (gross domestic product) in advanced economies, 10 per cent of GDP in emerging market economies, and about 7 per cent in low-income-countries. These increases come on top of debt levels that were already historically high.” The chances of a crisis caused by capital flight and subsequent austerity are correspondingly higher. 

The G20, which came into its own as a global decision-making body at the time of the last financial crisis in 2008-09, has already begun to address this issue. Through the “debt service suspension initiative” (DSSI), agreed upon by its finance ministers in April, debt payments till the end of the year by highly indebted countries stand suspended. The “Paris Club” of traditional creditor countries signed the agreement and much bilateral debt was correspondingly rolled over. But it is now clear that these arrangements were not enough. For one, the DSSI is due to come to an end with 2020, while the pandemic will remain for much of next year if not longer. Thus, the initiative should be extended at least into 2021.

The additional question, however, is that — as the IMF notes — most sovereign debt now is no longer owed to Paris Club countries. That is a euphemism for the fact that the People’s Republic of China is now a major creditor, particularly to lower-income countries. A group of economists at the Kiel Institute for the World Economy in Germany, which includes current World Bank Chief Economist Carmen Reinhart, found that for the 50 most indebted countries, “debt to China now accounts for close to 40 per cent of total reported external debt, on average. In addition, China’s state-driven lending abroad typically involves relatively high interest rates and short maturities”. Much of the debt owed to China is also hidden lending, including through state-controlled banks.

The presence of this lending greatly complicates the sovereign debt issue, particularly since some of it is improperly classified as private-sector debt and not as bilateral debt. It would be absurd for the global community to, either directly or through the IMF, bail out Chinese bondholders. This issue is certain to be discussed at the G20 in November. India’s voice will be crucial in determining the way forward. While a new sovereign debt-restructuring formula is important, India must also ensure that debt relations with Chinese state companies and banks be treated as bilateral lending. This is in keeping with domestic policy about Chinese capital.