Some debtor countries, such as Argentina, Ecuador, Lebanon, Nigeria, and Venezuela, had severe debt problems even before the pandemic, and have had to restructure their debt or default. Others, including Peru, entered 2020 with relatively strong debt and foreign-reserve positions, but have been badly hit by both the pandemic and the global recession.
Recognizing these acute financing constraints, the G20 agreed in April to suspend bilateral official debt payments for the world’s 73 poorest countries until the end of 2020. But this step falls short in four ways.
First, suspension is not forgiveness. There is little reason to think that the economic situation will be better at the end of the year. Further debt restructuring will be needed in some cases.
Second, it is unclear to what extent China will participate in the initiative. As Carmen Reinhart, Christoph Trebesch, and Sebastian Horn have found, China is not merely the world’s largest official creditor; its outstanding claims exceed the combined loan books of the International Monetary Fund, the World Bank, and the 22 other Paris Club governments combined.
Third, the G20 moratorium doesn’t include private creditors. Many debtor countries are reluctant to take up the suspension offer for fear that a credit-rating downgrade would shut them out of private capital markets.
In previous debt crises, the international community asked the private sector to participate simultaneously with the International Monetary Fund and rich-country governments. Rescue packages associated with IMF programs took steps so that the foreign exchange freed up by new public loans to debtor countries, conditional on domestic reforms, was not used only to pay off private creditors. In the currency crises of the 1990s, this was known as “private sector involvement.” Similarly, in the 1982 international debt crisis, rich-country banks were “bailed in” to the rescue effort, rather than being “bailed out.” Where debt restructuring is necessary, private creditors should do their share.
Finally, the G20 moratorium does not extend to middle-income countries, yet some will also need help.
What more can be done? EMDEs need to be able to export to the rest of the world in order to restore growth and earn enough foreign exchange to service their international debts. But global trade has collapsed, because the worst tariff war since the 1930s has been followed by the worst global recession since the 1930s.
As COVID-19 continues its global march, the whole world is paying the price for some countries’ negligent and incompetent political leadership and the virtual breakdown of the rules-based multilateral order. But emerging and developing economies are likely to suffer the most.
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers.