Big Reset: Debt Relief for Emerging Economies?

Central bankers and finance ministers of the largest economies will meet on November 13 to Debt relief for the poorest countries. This is an extra meeting, ahead of the regular G-20 summit that will take place in Saudi Arabia on 21 and 22 November. This additional meeting could mark a new stage in the cancellation of the debts of the poorest countries. In October, the largest economies already agreed on the need for debt relief, as many weaker economies have run into problems due to the coronavirus crisis.

Western countries are trying to convince China of the need to cancel debts. China has also lent a lot of money to trading partners in recent years, but does not want to write off these debts outright. Earlier, she agreed to a proposal by the G-20 to allow poor countries to postpone payment grant. Western countries want to go a step further by cancelling debts, but China is not yet keen on that. In exchange for debt relief, China also wants to be able to make demands. Western countries would be less inclined to do so.

Corona crisis

The coronavirus crisis is particularly affecting the poorest countries, as they have fewer opportunities for fiscal or monetary stimulus. Developed economies can borrow much more easily to the capital market, because they have a better credit status. As a result, there is more demand for government bonds of these countries. In addition, central banks such as the Federal Reserve and the ECB have much more opportunities to buy government bonds. For small developing countries, that room is limited, because investors quickly lose confidence in the currency in question.

Analysts at credit rating agency S&P Global recently warned against Large-scale write-downs of countries. Due to the coronavirus, several countries have introduced tax incentives. As a result, budget deficits and public debts have risen sharply worldwide. A write-down can sometimes have major consequences, because it can mean, for example, that institutional investors are no longer allowed to invest in it. In that case, interest rates will continue to rise and financing costs will rise. This, combined with a drop in tax revenues, could put the poorest countries in a debt trap.

This contribution was made from Geotrendlines