Amid growing concerns over the sluggish pace of debt restructuring for countries like Ghana and Zambia, the United States and China are reportedly in discussions to explore new measures aimed at preventing a potential wave of sovereign defaults in emerging markets.
This collaboration between the world’s two largest economies marks one of the most significant attempts at economic cooperation between rival superpowers in recent years.
According to authorities, the talks encompass a range of strategies, including preemptively extending loan periods for indebted nations before they miss payments. The overarching goal is to alleviate the substantial burden of servicing the $400 billion-plus annual debt and to mitigate the high borrowing rates faced by many of these nations in the global market.
In addition to extending repayment timelines, the discussions also involved considerations such as increasing financial assistance from institutions like the World Bank and other multilateral lenders. A crucial aspect of these deliberations is the timing; the aim is to implement these measures before countries reach the point of default and formal restructuring talks with creditors become inevitable.
Any collaborative proposal between the US and China on global sovereign debt issues would require the support of the full Group of 20 (G-20), as well as key international financial institutions such as the International Monetary Fund (IMF) and the World Bank.
These entities have grappled with resolving global debt distress since the onset of the COVID-19 pandemic. Moreover, garnering broad consensus from private creditors, who now wield significant influence in emerging market sovereign lending, would be essential for the success of any proposed measures.
The goal is to present a unified proposal to G-20 leaders at their upcoming summit in Rio de Janeiro scheduled for November. However, it’s important to note that these talks are still in their nascent stages, and it remains uncertain whether they will yield tangible outcomes. The individuals providing insights on the discussions requested anonymity to discuss the private nature of the talks.
A statement from the Treasury Department highlighted the frequent engagement with various countries to ensure that the international financial architecture adequately addresses the financing needs of low-income nations.
Debt Deadlock
A joint US-China approach would be a breakthrough as the two sides are the most powerful forces acting on many nations’ debt workouts: Washington dominates the global financial architecture through the Treasury Department’s influence at the IMF and World Bank, while Beijing essentially has veto power over many deals as the biggest creditor to developing countries.
The discussions come amid growing concerns over the slow progress of restructuring talks for countries like Zambia and Ghana, which are now engaged in a process known as the Common Framework, a program to restructure debts launched in 2020 by the G-20, World Bank and IMF.
The framework’s ambitions included bringing traditional lenders from the so-called Paris Club- mostly rich, Western creditor nations – around the table with emerging creditors, notably China and the private sector.
But that process has drawn criticism for moving forward at a dangerously sluggish pace, leaving defaulted countries suspended for years while dissuading others near bankruptcy from seeking help given the grinding process.
For example, Zambia defaulted in 2020 and has still not finalized an overhaul of its debts. It appeared to have reached an agreement for restructuring more than $3 billion of debt late last year, only to have it fall apart amid a standoff between Beijing and bondholders.
The talks between the US and China began before a meeting in California in November between Presidents Joe Biden and Xi Jinping and have continued into this year, according to one of the people.
As the specter of sovereign defaults looms over several emerging market economies, the collaboration between the US and China represents a significant step towards proactive debt relief efforts.
However, the success of these endeavors hinges on overcoming various challenges, including securing broad international consensus and navigating the interests of private creditors. Ultimately, the effectiveness of any proposed measures will be judged by their ability to provide meaningful relief to indebted nations and avert a looming financial crisis on a global scale.
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