The Debt Wall – Huge Public Debts, but Opposite Destinies Between Developed and Emerging Countries
The situation in the emerging countries is worrying, but this should not impact the global financial system more than that.
Faced with the COVID-19 pandemic that took hold of the world in March 2020, all countries responded in the same way. Developed and emerging countries, and even the poorest among them, have applied the well-known recipe: boosting their economies by increasing a public deficit financed by debt.
The effects of the crisis have therefore been partially or fully offset depending on the country.
According to the World Bank, the most disadvantaged emerging countries will have had to borrow more than $300 billion in 2020 and more than $300 billion in 2021. This represents no more and no less than a 40% increase compared to the figures before the COVID-19 crisis. That's twice as much as five years ago.
The poorest emerging countries will have to repay $35B this year. The money they don't have.
When one borrows, there is always a time when one has to pay back. This is the logical consequence. Starting this year, the 74 poorest countries in the world will have to pay back $35 billion. As you can imagine, these countries do not have the $35 billion at their disposal. And they won't get it this year.
These poorest countries simply cannot repay.
In this situation, they have only three options. The first is to borrow again, but this is becoming increasingly difficult and expensive. The second is to negotiate with their creditors to get the debt rescheduled. The third scenario is the worst-case scenario that each country will try to avoid: defaulting to renegotiate their debts by trying to reduce them.
In America, in the Eurozone, in China, or the United Kingdom, debts have also exploded due to the pandemic. The American public debt will soon exceed the $30T threshold:
The debt situation of countries is, therefore, more than worrying at the global level. If we can see a similarity here between rich and poor countries, two fundamental differences appear in favor of rich countries.
Two fundamental differences appear between developed and emerging countries relative to debt
When America or the Eurozone member countries go to borrow, they borrow their currency, respectively the US dollar or the Euro. On the other hand, when emerging countries borrow, it is most often in US dollars, not in their local currency.
This is the first difference, and it is a significant one, as we will see later.
The second difference concerns the source of the money borrowed. When the United States or countries in the Eurozone borrow, it is, for years and even more so since the health crisis, their own central banks that lend them indirectly. When emerging countries borrow, it is the financial markets and therefore large international borrowers that lend to them, not their central banks, which do not have the means to lend, even less in dollars or euros.
This gives rise to two major problems that will hit the poorest emerging countries hard in the months to come
This is where a major problem appears.
The poorest emerging countries, confronted with the crisis, see their exchange rates fall sharply, a fall amplified by the explosion of inflation at the global level. These countries have to repay a loan in US dollars, while their currencies are falling. This is the first major problem that developed countries do not have to deal with.
The second problem comes from creditors who have no reason to give gifts to emerging countries. They have lent money and therefore want to be repaid. Logical, you might say. For developed countries, the creditor is the central bank, which is itself a direct emanation of the country.
It is de facto more complicated for the Fed to force the American government to repay its debt, just as it is complicated for the European Central Bank to demand repayment of the masses of debt it holds on the countries of the Eurozone.
Final Thoughts
The situation in the face of this debt wall is therefore all the more serious for the emerging countries concerned, which are going to have to put up with pressure from the creditors that they have over-solicited in recent years. For the global financial system as a whole, the situation seems to me to be less serious because of the mass of money in circulation and therefore the relatively small share of emerging country loans concerning global debt.
The conclusion is more or less the same as usual: this problem of the debt wall will be put aside by the richest countries, while the poorest emerging countries will be strongly impacted in the coming months.
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