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Begin New Search Topic Debt Content Type Policy Brief Publication Year within 25 Years

1. The ABCs of Sovereign Debt Relief

Author:
Rakan Aboneaaj, Jocilyn Estes, and Clemence Landers
Publication Date:
10-2022
Content Type:
Policy Brief
Institution:
Center for Global Development
Abstract:
We are living in a time when many countries face heightened debt vulnerabilities. Already high before the pandemic, debt levels reached a 50-year peak following the growth in government spending to combat COVID-19. Debt is not inherently bad; borrowing can allow countries to finance vital government investment. But unsustainable levels of debt can have devastating consequences for a country’s population, crowding out government spending on even basic necessities including food, medicine, and fuel imports. In Sri Lanka, for example, 71 percent of government revenue was spent on debt service before the country defaulted. Even where the tradeoff is not so dire, unsustainable debt service can limit productive investments in infrastructure, education, healthcare, and other sectors, hampering the economic growth necessary to reduce a country’s debt burden. After a decade-long period of low borrowing costs, a confluence of rising interest rates, inflation, and commodity shocks have raised the likelihood of overlapping debt crises in developing countries. The International Monetary Fund (IMF) now estimates that 30 percent of emerging market countries and 60 percent of low-income countries could face trouble paying down their debts or will soon. There is no international bankruptcy mechanism for countries that default on their external obligations. Instead, countries have historically depended on a patchwork of precedents, contracts, and conventions to bring creditors to the table for debt relief negotiations. The United States has a legacy as the lead architect of large global debt relief initiatives, from the Brady Bond plan for Latin America to the Heavily Indebted Poor Countries (HIPC) Initiative that kickstarted debt relief for poor countries in the 1990s. However, the global creditor landscape has changed significantly over the past decade. Low-income sovereigns’ largest creditors today—China and private bondholders—operate under much different principles than the leading bilateral creditors of the past, making the traditional norms and structures less effective for present debt challenges. The objective of the international financial architecture—historically overseen by the IMF and its shareholders— will be to corral these new creditors into a cooperative arrangement to deliver on debt relief.
Topic:
Debt, Development, Governance, Credit, and Sovereign Debt
Political Geography:
Global Focus

2. Xi Jinping’s Evergrande Dilemma

Author:
John Lee
Publication Date:
09-2021
Content Type:
Policy Brief
Institution:
Hudson Institute
Abstract:
Evergrande is one of the top-two real estate developers in a still highly fragmented Chinese sector. Its main strategy is to achieve ever-increasing scale (rather than profitability) in order to move ahead of and crowd out commercial competitors. It has also amassed the largest land reserves of all Chinese developers, which were financed through massive borrowings. By 2018, Evergrande held 822 pieces of undeveloped land in 228 cities, with a planned gross floor area of 3.28 billion square feet of new homes—the equivalent of 10 percent of Germany’s entire housing stock. It paid $75 billion just for this undeveloped land. Although Evergrande’s market share is only around 4 percent, its borrowings stand out. Its current balance sheet liabilities amount to an estimated 2 percent of China’s gross domestic product (GDP), while its off-balance-sheet liabilities could be another 1 percent of China’s GDP. This makes Evergrande the most indebted property developer in the world. Burdened by this debt, struggling to meet its debt interest and repayment obligations, and viable only if property asset values and sales continue to increase, Evergrande faces possible financial collapse—an event bound to have flow-on effects for the Chinese economy. However, the unusually high global interest in Evergrande has arisen because its woes are increasingly seen as symptomatic of those faced by the broader Chinese economy, which is struggling with enormous levels of indebtedness and overreliance on the real estate sector. Debt held by nonfinancial institutions in China increased from about 115 percent of GDP in 2010 to around 160 percent of GDP currently. This is the most rapid and largest increase in a 10-year period for any major economy and makes the level of debt held by Chinese nonfinancial institutions one of the highest in the world. The real estate sector accounts for around 15 percent of GDP, while property services account for another 14 percent—the highest in any developing economy. The share of the real estate sector as a proportion of GDP was only about 4 percent in 1997 and 9 percent in 2008. Since 2008, up to a third of all domestic fixed investment has gone into real estate, and up to half of total national debt is linked to the real estate sector.
Topic:
International Relations, Foreign Policy, Debt, Economics, Markets, and Business
Political Geography:
China and Asia

3. Will corporate debt choke the post-COVID-19 recovery?

Author:
Frederico Mollet
Publication Date:
01-2021
Content Type:
Policy Brief
Institution:
European Policy Centre (EPC)
Abstract:
Europe’s economic recovery is threatened by the corporate debt overhang created in the wake of the pandemic. Even as vaccines roll out, Europe faces the prospect of a prolonged retrenchment as indebted firms pull back investments and repair their balance sheets. Insolvency procedures have gradually improved over the past decade in Europe, but decisive and swift public action is needed to take advantage of these reforms. Given the scale of the crisis, Frederico Mollet argues in favour of a comprehensive European restructuring strategy. EU member states and the Commission must step in to provide the resources, guidance, and coordination necessary to push through this monumental restructuring. This strategy would furthermore benefit from common European guidelines and criteria for creditors and debtors. It will not only increase the likelihood of success but also protect the level playing field. Lack of a clear strategy and coordinated approach will result in a drawn-out restructuring process that pushes too many viable firms into liquidation and permanently hampers the economic recovery. Centring on private restructurings would also minimise the use of public funds at a time when governments have to deal with multiple competing fiscal pressures.
Topic:
Debt, Political Economy, and Economic Recovery
Political Geography:
Europe

4. Germany’s Debt Brake and Europe’s Fiscal Stance after COVID-19

Author:
Shahin Vallée, Jérémie Cohen-Setton, and Dominik Buhl
Publication Date:
05-2021
Content Type:
Policy Brief
Institution:
German Council on Foreign Relations (DGAP)
Abstract:
Germany’s plan to return to its debt brake creates a serious risk of premature fiscal tightening. Given that the fiscal divide between Europe and the US will widen sharply in 2021, a hasty return to European and German fiscal rules would stifle recovery and undermine efforts to rebuild transatlantic ties in trade and macroeconomic cooperation. This paper proposes several practical options to attenuate the fiscal drag associated with a return to the debt brake and calls for a broad debate on its reform.
Topic:
Debt, European Union, Finance, Transatlantic Relations, and COVID-19
Political Geography:
Europe, Germany, and United States of America

5. Containing the Pandemic Public Debt

Author:
Committee for Economic Development of the Conference Board
Publication Date:
05-2021
Content Type:
Policy Brief
Institution:
The Conference Board
Abstract:
In early 2020, the COVID-19 pandemic presented the entire world with its worst public health threat in at least a century. The precise seriousness of the pandemic, of course, could not be known at the outset; and in fact, the pandemic is not yet vanquished as this statement is written. The extent of the damage the virus and its mutations will ultimately cause is not yet fully known. But the near-miraculous efforts to develop vaccines, contain the infection, and treat the infected provide much-needed hope that a return to “normal” is not out of reach. The pandemic had economic consequences as well. And like the public health impact, the shock to the economy was large but impossible to assess accurately at its outset. And like the damage to public health, the economic fallout is still impossible to assess today with complete accuracy. For the first time in 100 years, stay-at-home orders to protect the public health spurred an economic downturn and dramatic job losses—leaving a wide swath of businesses in hospitality, travel, leisure, dining, and retail nearly shut down, with entire occupations, such as personal service workers, facing extended layoffs or even permanent job loss. The fates of these businesses and workers are unpredictable, depending on the uncertain course of the pandemic itself. Another similarity between the public health and the economic threats is that prudent public policy required strong and immediate responses. With the ultimate extent of the damage unknown but potentially catastrophic, executive and congressional policymakers deemed it essential that government react swiftly and robustly. Policymakers and commentators repeated often that the nation should err on the side of action—that it would be better to do too much rather than too little.
Topic:
Debt, Economy, Public Health, Pandemic, and COVID-19
Political Geography:
North America and United States of America

6. Improving China's participation in resolving developing-country debt problems

Author:
Martin Chorzempa and Adnan Mazarei
Publication Date:
05-2021
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The COVID-19 shock has exacerbated the struggles of many emerging-market and developing economies (EMDEs) to repay their external debt. One of the most urgent challenges relates to debt owed to China, whose lending spree under its Belt and Road Initiative and other programs has played an outsized role in what amounts to a crisis for many countries. The scope of the problem is striking. China is owed more than $100 billion, or 57 percent of all debt owed to official creditors by the countries that need help the most. China is not a member of the Paris Club of official creditors, which coordinates, within a multilateral framework, the resolution of general sovereign illiquidity or unsustainable external debt of EMDEs. There is an urgent need to put in place more effective, long-term solutions to help durably lower the risks of prolonged debt difficulties in EMDEs. These problems could be partly addressed by creating creditor committees to coordinate debt relief with China. The Group of Twenty (G20) has taken some steps to include creditor committees in the context of the Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI), but only for low-income countries that qualify for the DSSI and only for official creditors. To better address debt distress, it needs to extend the approach, especially to middle-income debtor countries.
Topic:
Debt, Development, Emerging Markets, and G20
Political Geography:
China and Asia

7. Accounting for climate policies in Europe’s sovereign debt market

Author:
Marta Dominguez-Jimenez and Alexander Lehmann
Publication Date:
05-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
International debt investors increasingly demand assets that are aligned with environmental, social and governance objectives. Sovereign debt is being belatedly swept up in this change. This huge asset class represents a uniquely long-term claim and funds a wide range of public expenditure, both brown and green. Public capital expenditures will be a central part of the roughly €3 trillion investment budget needed to pay for the European Green Deal. European Union countries have so far met investor appetite for climate-aligned assets through sovereign green bonds, the issuance of which has rapidly grown since 2017. The EU itself will also issue green bonds in large volumes. However, because of some inherent flaws in such instruments and as their still-weak frameworks, these bonds are unlikely to meet the environmental criteria demanded by investors, and will complicate established principles in sovereign debt management. Much more comprehensive information is needed on the climate related aspects of the public budgets of EU countries. Greater transparency in this respect would support stability and improve the functioning of capital markets, given that sovereign debt plays a pivotal role in all investor portfolios and also in regulatory and monetary policy. Adoption by sovereign issuers of green budgeting principles, based on a common taxonomy of sustainable activities, would enhance transparency. It could also be driven by investors who, under new EU rules, must disclose the climate-related aspects of all financial instruments offered in the capital market.
Topic:
Climate Change, Debt, Markets, Sovereignty, European Union, Finance, and Sustainability
Political Geography:
Europe

8. Hezbollah Has a New Strategy to Survive Lebanon’s Financial Crisis

Author:
Hanin Ghaddar
Publication Date:
03-2020
Content Type:
Policy Brief
Institution:
The Washington Institute for Near East Policy
Abstract:
Unless Washington and its allies respond to the protestors’ legitimate demands for reform, the group will survive through measures such as expanding its smuggling activity, promoting its financial institutions, and selectively scapegoating corrupt politicians. When IMF officials visited Lebanon late last month amid its accelerating economic freefall, many wondered whether these developments might alter the behavior of Hezbollah, the designated terrorist group that has a deep financial stake in the country’s public and private sectors. During a previous funding crisis—the increase in U.S. sanctions against the group’s chief underwriter, Iran—the “Party of God” and its foreign sponsors formulated a new strategy to evade these measures and create alternative sources of funding. Such sources allowed Hezbollah to make further inroads into government agencies following the 2018 parliamentary elections. For example, the group’s leaders insisted on controlling the Health Ministry, which commands Lebanon’s fourth-largest budget at $338 million per year; they also gained more access to the Ministry of Public Works and Transport, the Agriculture Ministry, and the Ministry of Energy and Water, whose assistance was used to fund their affiliated projects and businesses. That worked until Lebanon’s own economy began its current nosedive. Unemployment has hit a record high of 40 percent, and the lira has slumped by about 60 percent on the parallel market, hiking inflation. Officially pegged to the dollar, the currency has plummeted 40 percent on the black market as local banks ration dollars necessary for imports of food, medicine, and other essential goods. Meanwhile, Lebanon has one of the highest debt-to-GDP ratios in the world (over 150 percent) and may not be able to pay $1.2 billion in Eurobonds this month. As with the Iran sanctions, however, Hezbollah has a strategy to survive this domestic pressure, at least in the near term.
Topic:
Foreign Policy, Corruption, Debt, Politics, Protests, and Hezbollah
Political Geography:
Middle East, Lebanon, and United States of America

9. Ghana’s Oil Sales: Using Commodity Trading Data for Accountability

Author:
Alexander Malden and Denis Gyeyir
Publication Date:
12-2020
Content Type:
Policy Brief
Institution:
Natural Resource Governance Institute
Abstract:
The coronavirus pandemic has severely impacted the Ghanaian economy, with the IMF projecting that growth will slow to just 1.5 percent in 2020 compared to December 2019’s projection of 5.8 percent. The country, like many oil-rich states, is facing the challenge of responding to the pandemic with reduced government revenues resulting from the oil price crash. The coronavirus has also exacerbated the country’s debt sustainability issues, which were already on the rise prior to the pandemic. Ghana is still a relatively new oil producer, with first production from its Jubilee field occurring in November 2010 and the first cargo sold in early 2011. However, the sector represents a significant source of revenue. Ghana’s oil revenues totaled USD 938 million in 2019. Around USD 802 million of this amount, or 86 percent, came from cargos of oil sold by the Ghana National Petroleum Company (GNPC). This oil represents the state’s share of production that it derives from in-kind royalty payments and GNPC’s carried and participating interest (CAPI) in the three oil-producing projects in the country. GNPC oil sales equaled a full nine percent of Ghana’s government revenue in 2019. Responding to the pandemic with reduced government revenues makes it more important than ever that citizens are able to analyze GNPC’s oil sales activities. In this context, in this report the authors demonstrate how publicly available data on the state’s oil sales activities can be used by civil society organizations (CSOs), government, media and other oversight actors to hold the government, GNPC and trading companies accountable for how they sell and manage Ghana’s oil and its revenues. Commodity trading activities are often opaque and do not receive the same level of scrutiny as a state’s upstream operations. This opacity can create opportunities for governance and corruption risks that result in the loss and mismanagement of potential revenues. However, Ghana is one of the most transparent countries in reporting on its commodity trading activities. GNPC, the Ministry of Finance, the Bank of Ghana, the Public Interest and Accountability Committee and Ghana Extractive Industries Transparency Initiative (GHEITI) all disclose information on the state’s oil sales activities. As one example, the MoF has disclosed information on the volume, unit price, date of sale and value for every cargo sold by GNPC to date.
Topic:
Debt, Oil, Accountability, Commodities, Trade, and COVID-19
Political Geography:
Africa and Ghana

10. Born Out of Necessity: A Debt Standstill for COVID-19

Author:
Patrick Bolton, Lee Buchheit, Pierre-Olivier Gourinchas, Mitu Gulati, Chang-Tai Hsieh, Ugo Panizza, and Beatrice Weder di Mauro
Publication Date:
04-2020
Content Type:
Policy Brief
Institution:
Economics for Inclusive Prosperity (EfIP)
Abstract:
Rich and poor countries alike are facing an unprecedented economic crisis as they attempt to contain the impact of the COVID-19 pandemic. A downturn of this magnitude can cause tremendous long-term damage, with critical economic linkages between employees, businesses, and banks at risk of disappearing forever. Scores of firms will close permanently unless urgent action is taken. The threat is even more significant for emerging economies, where the economic costs of social distancing are likely to be higher, and where vulnerable small and medium sized enterprises with low cash reserves account for a much larger share of the economy than in rich countries, which can rely on extensive social and economic safety nets. Poor countries, moreover, have far more precarious health-care systems. The funds required to support vulnerable workers and businesses, and to care for COVID-19 patients, could be as high as 10% of their GDP. As a comparison, in the US the rescue measures passed in the last month alone account for at least 10% of GDP, and are likely to increase even more. A number of European countries have commited loans, equity injections and guarantees up to 35% of GDP. The COVID-19 crisis has led to a sudden collapse in capital flows to emerging and developing countries. According to estimates by the Institute of International Finance, non-resident portfolio outflows from emerging market countries amounted to nearly $100 billion over a period of 45 days starting in late February 2020. For comparison, in the three months that followed the explosion of the 2008 global financial crisis, outflows were less than $20 billion.
Topic:
Debt, Economics, International Political Economy, GDP, Business, Macroeconomics, Pandemic, COVID-19, and Credit
Political Geography:
Global Focus