As the new year has started off with a new variant of the corona virus we thought why not take a look at a new and an untouched topic. As the corona virus broke out all over the world many countries were forced to enforce a lockdown to curb the spread of this virus. And this lockdown put a major hit on the economy of other countries and especially on the low income countries which were drowned in debt even before the pandemic hit and the pandemic has only worsened the state of these countries. But how bad is the current situation? How did this get so awful? Let us know here, at Truly Global.
What is the current situation?
Before the COVID-19 pandemic, rising public debt levels were already a cause for distress, particularly in many of the world’s poorest countries. In the past, in search of high returns investors gobbled up the debt of poor countries and as a result the debts of the poor countries have skyrocketed and these countries owe record amounts of money to investors, governments and others outside their borders. Belarus changed its mind towards a default when a promised loan of $600 million from Russia fell through. Tanzania’s president has asked the rich countries that gave them loan to cancel his country’s debt. Argentina defaulted for the ninth time in history. Emerging markets and developing countries have about $11 trillion in external debt and about $3.9 trillion in debt service due in 2020. Of this, about $3.5 trillion is for principal repayments. Around $1 trillion is debt service due on medium- and long-term (MLT) debt, while the remainder is short-term debt. The situation is so worse that Mitu Gulati(law professor at Duke university) has compared this to time of The Lost Decade of the 1980s!
How did it get so bad?
During the initial days poor countries were borrowing from institutions like World Bank, International Monetary Fund or from governments like China. But in recent years they are borrowing from private investment firms in the form of bonds. Private investors in the greed for high returns and low interest rates have bought up more debt than official lenders in Latin American, East Asian and emerging European countries. And the main reason as to why these countries should not take money from these firms can be seen in the case of dispute between Argentina and Elliot management. Elliott Management, a New York hedge fund bought Argentine bonds shortly before the country defaulted in 2001, and held out for full repayment rather than settling it through debt restructuring. The situation got so worse that at one point they even seized an Argentine naval vessel. When the sides finally settled in 2016, Elliott received nearly 400 percent of its original investment, according to Argentine officials! Yeah these firms lobby hard on the countries who fail to pay their debts and in the name of settling they take huge amount of returns and at the end the suffers are the people of the country.
While there is a growing risk of debt crisis. The problems start occurring to the poor people as the government starts to withdraw funds from services like free and cheap health care, education and things get costly and people will be hit by inflation making everything costly. But it is also true that this problem issuing recognised and the international monetary fund has started by expanding two emergency loan programs, for which more than 100 countries have applied. And few countries like Jamaica have started to withdraw their loans while others are still being reviewed. But still the main problem is that, these methods will help in short term but these countries are going to need much more financial assistance in cases of global recessions or pandemics because of their vulnerable economy and sadly we do not seem to be focusing on the long term solution for problems like this which is heavily stirring the people of these countries.
If you have stuck till now, thank you. We thought that as the threat of a second wave have struck some countries and while corona has been eradicated in some other countries the situation of the poor countries is worse because they cannot afford a second wave not have the capacity to handle it on their own leave alone eradicating it, and this going to cost them even more and their debt might increase if aid isn’t provided or a permanent solution is not figured out to get this countries out of debt. So if you liked this post, please do not forget to like it and share it with as many people as you can, so that many people are aware about the situation of these countries. and if you want to know more about this topic we will suggest you to read the International Monetary Fund's working paper, Why Do Emerging Markets Borrow in Foreign Currency, by Olivier Jeanne(click here).
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