By Patricia Cohen
The Vatican’s meeting on the global debt crisis last week was not quite as celebrity-studded as the one that Pope John Paul II presided over 25 years ago, when he donned sunglasses given to him by Bono, U2’s lead singer.
But the message that the current pope, Francis, delivered this time — to a roomful of bankers and economists instead of rock stars — was the same: The world’s poorest countries are being crushed by unmanageable debt and richer nations need to do more to help.
Emerging nations are contending with a staggering $29 trillion in public debt. Fifteen countries are spending more on interest payments than they do on education, according to a new report from the United Nations Conference on Trade and Development; 46 spend more on debt payments than they do on health care.
Unmanageable debts have been a recurring feature of the modern global economy, but the current wave may well be the worst so far. Overall, government debt worldwide is four times higher than what it was in 2000.
Government overspending or mismanagement is one cause, but global events out of most nations’ control have pushed their debt problems into overdrive. The Covid-19 pandemic slashed business profits and worker incomes at the same time health care and relief costs were increasing. Violent conflicts in Ukraine and elsewhere contributed to rising energy and food prices. Central banks raised interest rates to combat soaring inflation. Global growth slowed.
Pope Francis has called for a transformation of the global financial system in addition to loan forgiveness. “Let us think of a new international financial architecture that is bold and creative,” he said last week.
Many economists and policymakers are coming around to the view that mechanisms and institutions, including the International Monetary Fund, that were created 80 years ago to deal with countries in financial distress are simply not up to the task anymore.
It’s like having a crackerjack television repairman who knows how to replace cathode ray tubes but not circuit boards. Indermit Gill, chief economist at the World Bank, made a similar point this week as the bank released its latest global economic report, which warned of the crippling impact of debt at a time of slowing growth.
Debt relief “is the weakest part of the global financial architecture,” Gill said. Changes in borrowing, he added, “require a new debt restructuring framework which we don’t have in place yet.”
Rising frictions between China and the United States have made it more difficult to resolve debt crises. And there is no international referee with authority over all the lenders — the equivalent of a bankruptcy court — to adjudicate disputes.
Nor has funding for institutions like the I.M.F. kept pace with the expanding size of the global economy or the debt burden.
Martin Guzmán, a former finance minister of Argentina who also experienced the devastating impact of his native country’s debt crisis, was at the Vatican meeting last week. In his view, IMF help is sometimes counterproductive, offering bailout loans, now with high interest rates, that end up increasing a country’s already burdensome debt.
He has also railed against the extra fees, or surcharges, that the fund imposes on struggling high-risk debtors, siphoning precious funds that could be used to provide health care and rebuild an economy.
The five largest borrowers — Ukraine, Egypt, Argentina, Ecuador and Pakistan — paid $2 billion alone in surcharges last year, according to the Center for Economic and Policy Research. On average, surcharges ended up raising the cost of borrowing for all affected countries by nearly 50 percent.
At the moment, the outlook for debt-ridden nations is grim given how slowly their economies are growing. Emerging nations do not have the money to pay for critical education, infrastructure, technology and health care. Roughly 60 percent of low-income nations are in or at high risk of debt distress, according to the IMF.
At the same time, trillions of additional dollars are needed to protect these vulnerable nations from extreme weather and enable them to meet international climate goals. After returning from the Vatican conference, Joseph Stiglitz, a former chief economist at the World Bank, said that during the 2000 Jubilee debt campaign, “there was an optimism then that we had learned the lessons,” and that the debt forgiveness program would “solve the problem going forward.”
“It obviously hasn’t,” he said. “The problem has gotten much, much worse than we could have imagined 25 years ago.” — The New York Times
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