Lhe Covid-19 pandemic has left behind an extremely precarious economic and social situation in emerging countries. If the developed world succeeded in deploying unprecedented financial shock absorbers to mitigate the violence of the shock, the poorest countries did not have the means to do so and must now face consequences that promise to be lasting.
Poverty, which had continued to decline over the past twenty years, is exploding. Inequalities are widening. The education and health sectors have been deeply disorganized. The Russian invasion of Ukraine has only darkened the picture further by fueling inflation on energy and food products.
On the financial level, international institutions are sounding the tocsin. The over-indebtedness of emerging countries does not date from the pandemic, but it has taken on even more worrying proportions with the crisis. The situation has become more complicated since advanced economies have begun to tighten their monetary policies to fight inflation. Higher interest rates risk causing capital flight in emerging countries, serial devaluations and an increase in debt servicing, which will only further weaken their solvency. These prospects should prompt Western central banks to exercise extreme caution.
In the meantime, it is essential that the international community get down to restructuring the sovereign debt of these countries. During the pandemic, some took advantage of a reprieve thanks to a freeze on their reimbursements. While these measures are coming to an end, solutions to reduce the weight of the debt are slow to be found. In the past, public creditors were able to resolve this type of crisis within the informal framework of the Paris Club. But the rise of private investors and the growing weight of China on the debt market have complicated the negotiations.
Added to this is another difficulty. Asking for help for an emerging country is immediately perceived by financial rating agencies as an admission of weakness, which is immediately sanctioned by a deterioration in its financing conditions. Result: half of the poor countries that could have benefited from the reimbursement freeze during Covid-19 have given up on it, for fear of entering this vicious circle.
Investors bear their share of responsibility for the current situation. The overabundant liquidity provided by the central banks’ monetary policies did not encourage them to be very careful about the risks they were taking. After having taken advantage of this very rewarding period for them, the least they could do is assume the consequences today.
To imagine that we can let these countries sink without the developed world suffering the effects is illusory. Their integration into the global economy and their contribution to growth are such that their failure will be ours. Experience shows that there is no advantage in delaying sovereign debt restructurings. The more time passes, the less the creditors are likely to regain their investment and the more the situation of the creditor countries becomes irremediable, with exorbitant costs in human, economic and financial terms. The G20, which meets in November in Bali (Indonesia), absolutely must give impetus to a debt restructuring process which is in everyone’s interest.