The Multipolar Debt Crisis

Tomasz Konicz, Originally published in jungle world on 06/01/2023

More and more countries in Latin America, Africa and Asia are over-indebted or even facing bankruptcy. As a lender, China is also affected by this crisis and has had to grant emergency loans to protect its own banks from payment defaults.

The interest rate hikes by Western central banks to combat stubborn inflation – the key rate is now 5 to 5.25 percent in the U.S., and 3.75 percent in the euro zone – have already led to the collapse of three regional banks in the U.S. and are dampening economic growth on both sides of the Atlantic. But this turbulence is nothing compared to the shocks facing many economically weaker countries. As it becomes more and more expensive to take out new loans, they are finding it increasingly difficult to service their foreign debts, most of which are denominated in U.S. dollars.


Particularly in Africa, Asia, Latin America and the Middle East, more and more countries are finding themselves in a classic debt trap, in which economic stagnation, recession and rising borrowing costs fatally interact. The situation has already been compared to the “Volcker shock” of 1979, when the then chairman of the U.S. Federal Reserve, Paul Volcker, raised key interest rates in the U.S. to over 20 percent at times to combat many years of stagflation, triggering a debt crisis particularly in countries in South America and Africa.

In mid-April, the Financial Times, citing a study by the NGO Debt Justice, reported that the foreign debt service of a group of 91 of the world’s poorest countries would consume an average of 16 percent of their government revenues this year, with that figure expected to rise to 17 percent next year. The last time a similar figure was reached was in 1998. The hardest hit, according to the report, is Sri Lanka, whose debt service this year is equivalent to about 75 percent of projected revenues, leading the Financial Times to expect the island nation to “default on payments” this year.

Zambia, which, like Sri Lanka, went through a sovereign default last year, is also in acute danger. The situation is similarly dire in Pakistan, where 47 percent of government revenues will have to be used to service foreign loans this year. The consequences for the people of these and many other countries are already dramatic: Governments are no longer able to pay salaries, for example, or finance imports of energy or food, and the fall in the value of their currencies is exacerbating inflation, poverty and hunger.

But it is not just the poorest countries that are threatened. In Argentina, for example, where the central bank is printing money to finance the budget deficit, inflation has reached 109 percent and threatens to turn into devastating hyperinflation. Like many other states in crisis, Argentina has signed an emergency program with the International Monetary Fund (IMF) that includes $44 billion in loans in exchange for austerity measures. In mid-May, Argentine President Alberto Fernández called for renegotiations with the IMF in light of a drought-induced crop failure for wheat, Argentina’s most important export. Vice President Cristina Fernández de Kirchner called the agreement “scandalous” and a “fraud.”

China, which has become one of the world’s largest lenders in recent years, plays a special role in the current debt crisis. Under the global development program of the Belt and Road Initiative alone, also known as the “New Silk Road,” at least $838 billion in loans and transactions had been made by the end of 2021, mostly to finance infrastructure and other major projects in Africa, Asia and Latin America. Most of the loans were made by Chinese banks. China wanted to lay the foundation for future economic hegemony.

But since then – after the Covid 19 pandemic and the Russian invasion of Ukraine, the global surge in inflation and a slowdown of growth in China itself – Chinese banks have become more reluctant to lend to poorer countries. According to a study by the Rhodium Group, as early as 2021, about 16 percent of loans made abroad from China, worth about $118 billion, were at risk of default and would have had to be renegotiated.

Just one year later, the Chinese foreign debt crisis had already expanded considerably, according to a study by the Kiel Institute for the World Economy (IfW). According to the study, 60 percent of loans were already at risk of default in 2022, prompting Beijing to grant 128 emergency loans totaling $240 billion to 22 debtor countries. In most cases, the debtor countries are only granted a deferral by issuing new loans to repay due payments, which allows for an “extension of maturities or payment terms”; a cancellation of debts occurs “only extremely rarely,” according to the IfW.

Most of these refinancing loans were granted by the Chinese central bank, which effectively rescues the Chinese banks that originally granted the loans. The authors of the IfW study therefore compared China’s current actions to the granting of so-called rescue loans to Greece and other southern European countries during the euro crisis, which also involved rescuing banks that were threatened with default.

Crisis and bridging loans flow mainly to “middle-income countries” because they account for 80 percent of China’s foreign credit volume and thus represent “major balance sheet risks for Chinese banks,” according to the IfW. Low-income countries, on the other hand, have received very little in the way of crisis loans, as their sovereign bankruptcies would be unlikely to jeopardize the Chinese banking sector. Moreover, the average interest rate on Chinese crisis loans is said to be five percent; the IMF standard is two percent. Debtor countries that have received crisis loans include countries such as Sri Lanka, Pakistan, Argentina, Egypt, Turkey and Venezuela.

The IfW also noted that for a large part of the rescue loans, the modalities and scope of the loan programs are not publicly available. As a result, “the international financial architecture is becoming more multipolar, less institutionalized and less transparent.” This lack of transparency also affects loans previously made by Chinese banks, they said. In a recent in-depth report on the debt crisis, the Associated Press (AP) news agency cited findings from a study by the research group Aid Data that found at least $385 billion in Chinese loans in 88 countries through 2021 alone that were “hidden or inadequately documented.”

Many of the poorest countries in Africa or Asia readily accessed Chinese money at the height of the global liquidity bubble between 2010 and 2020, using it to finance infrastructure and prestige projects that are increasingly turning into investment ruins during the current crisis surge. For these countries, secrecy is now a serious problem because, in the event of default, the affected country’s international creditors will have to agree on who will defer loans or waive repayments, and to what extent. However, Western lenders and institutions such as the IMF or the World Bank are currently refusing emergency programs in many cases because the modalities of China’s loan programs are unclear and they cannot reach an agreement with China. Some poor countries are therefore in a “state of limbo,” writes AP, because China is unwilling to accept losses, while the IMF refuses to grant low-interest loans if they are only used to pay off Chinese debts.

The lenders’ negotiations are further complicated by the intensifying global political competition between Western countries and China. The increasing fragmentation of the global economy makes it “more difficult to resolve sovereign debt crises, especially when there are geopolitical divisions among major sovereign lenders,” IMF Managing Director Kristalina Georgieva warned in January.

Western countries, meanwhile, are hoping to use China’s foreign debt crisis to roll back the influence China has built up through its lending in many regions of the world. EU Commission President Ursula von der Leyen said in May that there was now an “opportune moment” for the G7 countries and their partners after “many countries in the Global South have had bad experiences with China” and found themselves in “debt crises,” while Russia had only “mercenaries and weapons” to offer. If the West acted quickly, she said, it could form mutually beneficial partnerships with these countries. Companies and banks could be involved in developing “comprehensive packages” that would also shift parts of production chains to developing countries. She said the EU wants to promote “not only the extraction of raw materials, but also their local processing and refinement.” Von der Leyen is thus speculating with a bad memory of her potential “partners” in the Global South, who have already had painful experiences with Western credit programs since the 1970s.

Originally published in jungle world on 06/01/2023

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