Last week’s meeting at the Vatican on the global debt crisis was not quite as star-studded as the meeting led by Pope John Paul II more than 25 years ago, when he donned a pair of sunglasses given to him by Bono, the lead singer of U2.
But the message that current Pope Francis delivered this time to a room full of bankers and economists rather than rock stars was the same: The world’s poorest countries are crushed by unmanageable debt, and richer nations must do more to help.
Emerging markets are struggling with a staggering $29 trillion in national debt. According to a new report from the United Nations Conference on Trade and Development, 15 countries spend more on interest payments than on education; 46 spend more on debt payments than on healthcare.
Unmanageable debt is a recurring feature of the modern global economy, but the current wave may well be the worst yet. Overall, public debt worldwide is four times as high as it was in 2000.
Over-spending or mismanagement is one cause, but global events beyond the control of most countries have sent their debt problems into overdrive. The Covid-19 pandemic slashed corporate profits and worker incomes while increasing healthcare and aid costs. Violent conflicts in Ukraine and elsewhere contributed to rising energy and food prices. Central banks raised interest rates to counter rising inflation. Global growth slowed.
Both popes linked their appeals to what they called the Jubilee, or holy year – a celebration rooted in the Bible and tied to a time when slaves were freed and debts forgiven.
The 2000 anniversary campaign included an unusual coalition of religious leaders, musicians, academics, evangelical conservatives, liberal activists and politicians. More than 21 million people have signed petitions for debt relief. This ultimately led to an extraordinary global effort that saved 35 poor countries over $100 billion in debt.
Pope Francis has revived the idea of the church’s anniversary in 2025. When Francis was named a cardinal in Argentina in 2001 at the height of the country’s financial collapse, he saw firsthand the misery and violent unrest a debt crisis can cause.
In addition to loan forgiveness, he has also called for a transformation of the global financial system. “Let us think about a new international financial architecture that is bold and creative,” he said last week.
His speech was an acknowledgment that this century’s debt problems are much more complicated than those of the previous one.
Today, the world’s national debt is not only larger, it is also different.
At the time, most of the debt was held by a handful of large banks from Western countries and decades-old international development organizations. Today, in addition to these established players, countries must contend with thousands of private lenders and other official creditors such as China, as well as a multitude of partially secret loan agreements subject to different national regulations.
Many economists and policymakers have come to believe that mechanisms and institutions, including the International Monetary Fund, that were created 80 years ago to deal with countries in financial distress are simply no longer up to the task.
It’s like having a genius TV repairman who knows how to replace cathode ray tubes but not circuit boards.
World Bank chief economist Indermit Gill made similar comments this week as the bank released its latest global economic report, warning of the crippling effects of debt at a time of slowing growth.
Debt relief “is the weakest part of the global financial architecture,” Gill said. Changes to borrowing, he added, “require a new framework for debt restructuring, which we don’t yet have.”
Rising tensions between China and the US have made resolving debt crises more difficult. And there is no international arbitrator with authority over all lenders – the equivalent of a bankruptcy court – to decide disputes.
The funding of institutions such as the IMF has also failed to keep pace with the growing size of the global economy or the burden of debt.
Martin Guzmán, a former Argentine finance minister who also experienced the devastating effects of his home country’s debt crisis, was at the Vatican meeting last week. In his view, IMF assistance is sometimes counterproductive by offering rescue loans that now have high interest rates and end up adding to a country’s already burdensome debt.
He has also spoken out against the additional fees or surcharges the fund charges to struggling high-risk borrowers, siphoning off valuable money that could be used for health care and rebuilding the economy.
According to the Center for Economic and Policy Research, the five largest borrowers – Ukraine, Egypt, Argentina, Ecuador and Pakistan – paid $2 billion in markups alone last year. On average, the surcharges caused borrowing costs to rise by almost 50 percent for all affected countries.
Other attempts have also been made to reduce the burden on indebted countries. Lawmakers in two global financial capitals, New York and London, have discussed proposals to improve the sovereign debt restructuring process.
The New York State Legislature was considering a bill to protect debtor countries from creditors often called “vulture funds” that buy up debt at deeply discounted prices and then delay restructuring deals to squeeze out even more money.
The effort died down last weekend when the legislative session adjourned, but it’s likely it will come up again next session.
In Britain, where 90 percent of debt contracts for low-income countries are overseen, Parliament has debated measures such as a repealed 2010 law that would prevent private creditors from receiving better compensation than public lenders when debts arise be renegotiated with the poorest countries.
Currently, the outlook for indebted countries is bleak given slow economic growth. Emerging economies don’t have the money to finance critical education, infrastructure, technology and healthcare. According to the IMF, around 60 percent of low-income countries are in a debt crisis or are at high risk of a debt crisis
At the same time, trillions of additional dollars are needed to protect these vulnerable countries from extreme weather and enable them to meet international climate goals.
Returning from the Vatican conference, Joseph Stiglitz, a former World Bank chief economist, said that during the 2000 anniversary debt campaign, “there was optimism at the time that we had learned the lessons” and that the debt relief program “will solve the problem in the future.”
“That’s obviously not the case,” he said. “The problem has become much, much worse than we could have imagined 25 years ago.”
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2024-06-14 15:51:36
www.nytimes.com
