Samson: Debt relief is an urgent necessity during a pandemic
6th May, 2020
Gordon Brown Lawrence Summers
The developed world has responded to the emerging crisis of Coronavirus (Covid 19) by supporting their local economies and financial systems in bold and unprecedented ways, on a scale that no one would have imagined three months ago
By contrast, when the world’s finance ministers and central bankers meet online this week in the framework of the semi-annual meetings of the International Monetary Fund and the World Bank, steps will be taken to fortify the international system. But nothing could match what countries do at the local level
Historians such as Charles Kindleberger have made convincing arguments to demonstrate that it was the failure of international cooperation that made the Depression of the 1930s “great.” Even when the world witnessed coordinated movements in response to the crises that have occurred since then, it was often taken after incurring heavy human costs
The Bretton Woods conference on rebuilding the international financial system followed the devastation of a global war. Brady’s plan to solve the Latin American debt crisis was approved only after the region suffered a lost decade
However, the 2009 G20 meeting in London, which dealt with the global financial crisis, demonstrated the value of early and coordinated action to reduce the damage to the global economy, maintain trade and support fragile emerging markets
The next wave of (Covid 19) crisis is expected to occur in the developing world. About 900,000 people are likely to die in Asia, and about 300,000 others in Africa, according to grim estimates, but they may be wary, from Imperial College London
While social estrangement in the West has been the way to suppress the virus, the busy cities of the developing world and its densely populated slums often make isolation extremely difficult. Advice on washing hands becomes meaningless when the ability to access running water is minimal. In the absence of basic social safety nets, the choices become narrow and harsh
Either you go to work and risk getting sick, or you stay at home to starve you and your family. But if the disease is not contained in these places, it will return – in second, third and fourth waves – to chase every part of the world
The spread of economic and financial failure in emerging markets also threatens the viability of supply chains on which all countries depend. Given its sheer size, emerging market debt threatens the stability of the global financial system, which is already dependent on strong central bank support. And because emerging markets account for more than half of global GDP, global growth is also under threat
Just as the Federal Reserve in the United States and other major central banks have expanded their balance sheets in ways that could not have been imagined before, the international community this week, in the words of the former central bank chief Mario Draghi, should “do whatever it takes” to maintain the performance of the global financial system.
And at a time when the United States is borrowing an additional $ 2 trillion to meet its needs, it will be tragic for austerity to be imposed on the already exhausted developing world
First, the International Monetary Fund, the World Bank, and regional development banks must move as strongly as global central banks have done to expand their loans. This means realizing the fact that the interest rate environment currently close to zero makes it possible to use more leverage than before, and that maintaining reserves becomes meaningless if it is not possible to benefit from them now
The World Bank almost tripled its lending in 2009. Perhaps a more ambitious target is appropriate now, along with a significant increase in subsidized lending at a time when low lending rates in rich countries are making lending cheaper. The International Monetary Fund, with its gold reserves equal to $ 150 billion and a network of credit lines with central banks, should be prepared to lend up to a trillion dollars
Second, if there is an appropriate moment to expand the use of the international currency known as special drawing rights, it is now. If global money is to remain balanced with domestic monetary expansion in rich countries, the urgent need to increase special drawing rights to more than $ 1 trillion
Third, it would be a tragedy and a farce at the same time if increased global financial support to developing countries ended in helping those countries’ creditors, not their citizens. National debt due before the crisis should be at the top of the international financial agenda
The current proposal is that creditor countries offer to freeze bilateral debt payments for a period of six or nine months, at a cost of $9 billion to $13 billion. But this proposal is restricted in its timeframe and the scope of the creditors it includes
We suggest reducing more than $ 35 billion owed to official bilateral creditors over the next year and the next, because the crisis will not be resolved within six months and governments need to be able to plan spending with certainty
Here, the role of China, which holds more than a quarter of this bilateral debt, becomes crucial
Nearly twenty years ago, when we argued in favor of debt relief for nearly 40 heavily indebted poor countries, nearly all of the debt was owed to several official or multiple creditors, a small portion of which was owed to private sector actors. Now, we find that $ 20 billion – borrowed at often high interest rates – is due by the end of 2021 for private creditors
The international finance provider, representing the creditors of emerging markets from the private sector, also admitted that the private sector must bear its share of the pain. It is unreasonable to use the money flowing from our multilateral institutions to help the poorest countries not to spend on health care or anti-poverty measures, but simply to pay off private creditors
Especially creditors such as the major American banks that continue to pay dividends to their shareholders in a time of crisis. Ministers and governors meeting this week should work to unify their authority with the authority of the International Monetary Fund and the World Bank to mobilize the private sector around a voluntary plan to deal with this debt
Just as the epidemic can be contained in the most effective and least costly way with bold early measures, the lesson from the past is that the best way to deal with periods of international recession and their human costs is rapid, bold action. Now we have to move quickly and work together
Gordon Brown – Former Prime Minister of the United Kingdom (2007 – 2010) and Secretary of its Treasury (1997 – 2007
– Lawrence Summers – The United States Treasury Secretary (1999 – 2001), the Director of the National Economic Council US (2009 – 2010 and President of Harvard University (2001-2006 LINK
MilitiaMan: I mentioned the other day during and in the CC on Monday about that, imo, that there could be a placement into the SDR basket with the IQD…
Well this article and others lead me to think that way. It is a way that if placed into the basket where Iraq can use the facility to pay debts through borrowing through the basket against their shares of Special Drawing Rights they may be allotted by like funds.
This would bring financial security and support from members in the basket to Iraq.
Don’t forget that if Iraq has the possibility to get into the basket, their local currency may need to be strong with value and that could be at or around 3x SDR per WS in the past.
The ISX indice on the CBIESD site still shows they added value to the indices. Regardless if the ISX has yet to trade outside a program rate, they can’t trade outside a program rate, yet!
They need to raise the value of the currency first.
Just as they will need to to get the Secondary Markets interconnected imo.. Iraq stocks will not interlink at a program rate, ever, imo.. It have to meet international standards and rules.
So with this article talking about expanding the SDR basket, imo is no coincidence. Just as the FIMA and CML and the IMFs new SLL is in place for unique circumstances, like we have been going through since February 2020.. imo
So now that the foundation is in place, once Iraq sorts out the Taxes and Tarrifs, Electricity, LNG, the Secondary markets, being fully article 8, etc. they can take advantage of the many mechanisms in place to move their country and economy forward, and the world will mostly be directly affected by it and imo the SDR basket with the IQD in it may very well be the conduit to fortify the international system..
Let hope so!! imo ~ MM.