The developing world is on the cusp of its worst debt crisis since 1982. Back then, three years had to pass before creditors mounted the concerted response known as the Baker Plan, named after then-US Treasury Secretary James Baker. This time, fortunately, G20 governments have responded more quickly, calling for a moratorium on payments by low-income countries.
Predictably, perhaps, the G20’s declaration resembles the Baker Plan. There’s just one problem: the Baker Plan didn’t work.
The crisis currently engulfing the emerging and developing world is unprecedented. More than $100 billion of financial capital has flowed out of these markets – three times as much as in the first two months of the 2008 global financial crisis.
Remittances are poised to fall by an additional $100 billion this year. Developing countries’ oil and gas revenues may plunge by 85%. Global trade is on course to fall by up to 32%, three times as much as in 2009. All this is unfolding against the backdrop of a plague of locusts in Africa.
The financial context is an international monetary system that is still disproportionately dollar-based. For five years, we have been reassured that emerging economies have fully atoned for their “original sin.” In other words, their governments now can borrow in their own currencies, allowing them greater leeway to use monetary and fiscal policies.
Unfortunately, this observation ignores the inconvenient truth that these countries’ private companies borrow in dollars. It ignores that the dollar debts of emerging markets (excluding China) have doubled since 2008.
It also ignores that emerging markets, aside from the “Favored 4” (Mexico, Brazil, Singapore, and South Korea), lack swap lines with the US Federal Reserve. True, the Fed recently added a “repo facility” through which central banks can borrow dollars against their holdings of US Treasury securities. But that is cold comfort to countries that have already run down their reserves.
All of this means that, when it comes to the stabilizing use of monetary and fiscal policies, emerging markets are hamstrung.
Which is why we are back to Baker Plan 2.0. The G20 has offered to suspend interest payments on intergovernmental loans for the poorest countries. Private creditors, for their part, agreed to roll over an additional $8 billion worth of commercial debt. That, at least, is something.
But, to borrow the baseball apostle Yogi Berra’s line, it is also “déjà vu all over again.” The Baker Plan likewise proceeded on the premise that the shock was transient and that a temporary debt standstill would be enough. Creditors would roll over their loans. Growth would resume. Interest arrears then would be paid off once the crisis passed.