There must have been good feelings in extending $1 trillion of lending to the developing world through China’s global Belt and Road Initiative (BRI). A warm tide of rising influence and overdue recognition.
But perhaps there are fears now in Beijing that this lending spree coincided with the tail end of a long wave of global financial expansion.
The UN is warning that a “lost decade” looms for developing countries. And the BRI has been hit with “spiralling bad loans, with more than $78bn-worth of borrowing turning sour over the past three years”.
Not that the problem hasn’t been building for a while now. The World Bank helpfully published a macro study “Global Waves of Debt” which explains:
“the global economy has experienced four waves of debt accumulation over the past fifty years. The first three debt waves ended with financial crises in many emerging and developing economies.”
With impeccable timing the book was launched in December 2019.
Just before the Covid pandemic initiated a further global borrowing binge.
Debt isn’t all that bad, particularly when it’s used for productive investment which can finance its repayment and leave a handy surplus. But one can be sceptical as to how much of the developing world’s debt falls into the benign category.
Take Argentina for instance. Despite its impressive history of debt default, it has managed to steadily rachet up its external obligations to somewhere in the region of $300 billion, with little sign of repayment. And it’s even managed to get official money from the IMF.
But China’s emergence as a major debt power has at the very least complicated, and perhaps even destabilised, the established Western debt management system.
In a thoughtful piece, the Financial Times opines that “the fragile process for dealing with insolvent economies is now at risk of unravelling completely owing to a powerful and unpredictable force in sovereign debt”.
What this means is that the messy Western-led political-financial process which tried to balance help for struggling economies; avoiding disastrous losses; and not sending too much good money after bad; may not be able to cope. With a China that won’t play by the old rules and is not averse to side deals to leverage its own position (see the case of Argentina again).
In the short term, this leads to deadlock on debt restructuring and delay in economic stabilisation.
In the longer term, one might reasonably expect China to demand more political influence for its financial input. It’s hard to know whether to be more worried or relieved by this development.
You might worry more if you see parallels to the experience of the 1930s, where the inability to find international solutions to excessive debt encouraged polarisation in financial blocs and deglobalisation. And the resulting economic and financial crises helped spark political upheaval.
Most commentators do not see a debt crisis for developing countries as an existential threat for Western creditor nations and their financial system. But then not many have taken account of the changed circumstances.
And an international debt crisis certainly won’t help them deal with their own problems of slow growth, bungled decarbonisation, fragile banking systems and high debt.
Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton
Not that the problem hasn’t been building for a while now. The World Bank helpfully published a macro study “Global Waves of Debt” which explains:
“the global economy has experienced four waves of debt accumulation over the past fifty years. The first three debt waves ended with financial crises in many emerging and developing economies.”
With impeccable timing the book was launched in December 2019.
Just before the Covid pandemic initiated a further global borrowing binge.
Debt isn’t all that bad, particularly when it’s used for productive investment which can finance its repayment and leave a handy surplus. But one can be sceptical as to how much of the developing world’s debt falls into the benign category.
Take Argentina for instance. Despite its impressive history of debt default, it has managed to steadily rachet up its external obligations to somewhere in the region of $300 billion, with little sign of repayment. And it’s even managed to get official money from the IMF.
But China’s emergence as a major debt power has at the very least complicated, and perhaps even destabilised, the established Western debt management system.
In a thoughtful piece, the Financial Times opines that “the fragile process for dealing with insolvent economies is now at risk of unravelling completely owing to a powerful and unpredictable force in sovereign debt”.
What this means is that the messy Western-led political-financial process which tried to balance help for struggling economies; avoiding disastrous losses; and not sending too much good money after bad; may not be able to cope. With a China that won’t play by the old rules and is not averse to side deals to leverage its own position (see the case of Argentina again).
In the short term, this leads to deadlock on debt restructuring and delay in economic stabilisation.
In the longer term, one might reasonably expect China to demand more political influence for its financial input. It’s hard to know whether to be more worried or relieved by this development.
You might worry more if you see parallels to the experience of the 1930s, where the inability to find international solutions to excessive debt encouraged polarisation in financial blocs and deglobalisation. And the resulting economic and financial crises helped spark political upheaval.
Most commentators do not see a debt crisis for developing countries as an existential threat for Western creditor nations and their financial system. But then not many have taken account of the changed circumstances.
And an international debt crisis certainly won’t help them deal with their own problems of slow growth, bungled decarbonisation, fragile banking systems and high debt.
Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton
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