The 1980s debt crisis in Latin America played out in the same manner. The Fed took robust and necessary action that ended up triggering debt crises in emerging economies overburdened with debts. In 2022, emerging economies face a quadruple hit. These countries are grappling with the pandemic with lower vaccine access and take-up rates, and very high mortality rates, exacerbated by the Delta and Omicron variants. They are experiencing a slower economic rebound.
How big a problem is this debt distress and fiscal shock? The International Monetary Fund has warned of economic collapse in some low-income countries. This affects huge numbers of people across the globe. 60% of the world’s poorest countries are either at high risk of, or already in, debt distress, double the share in 2015, according to IMF Managing Director Kristalina Georgieva. The countries affected range from Chad, Ethiopia, Gambia, Kenya and Zambia to Afghanistan and Tajikistan.
A debt service suspension initiative that was designed to offer a temporary freeze in payments to low-income countries expired at the end of 2021. What these nations now need is, with accelerated debt restructuring talks involving public and private creditors. Such talks are never easy, and all sides must come to the table willing to be flexible and face some pain to get deals that are manageable and acceptable to everyone.
Creditors should not wait for disaster to act, for the real human cost is too high. And lenders should be willing to renegotiate. Private creditors must engage and face reality, while sovereign lenders, such as China, must step forward. If large players in either of these two groups refuse to deal with the debt distress, the outcomes will be worse for all concerned.
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