The world’s most indebted countries face another year in limbo

Twenty years ago, debt restructurings were a triumph of multilateralism. Governments and banks, watched over by the IMF, worked together to reduce the debts of countries that could no longer pay their bills. In return, poor countries agreed to the kind of free-market reforms that had made their creditors prosper. An official “Heavily Indebted Poor Countries” (HIPC) plan made write-downs of huge swathes of debt routine and relatively painless. Restructurings were proof of globalisation going well, and of the benevolence of rich countries at the helm.

Not any more. In 2024 the collapse of that system will continue. It has been at least three years since China agreed to a deal that writes down debts. The world’s fragmenting geopolitics now plays out in miniature in each creditor meeting. Beijing refuses to play by Western financiers’ rules, but as the world’s biggest creditor, it is too big to ignore. At least 21 countries were in default or seeking restructuring but only Zambia managed to get a deal done involving China.

Many other poor countries will remain stuck as relations between their lenders fray. Governments have to agree on a deal before private lenders can start negotiating. Sri Lanka’s biggest official creditors, China and India, refuse to sit in the same room. Each stage that was once a bureaucratic formality now takes months. Progress will continue to be slow or will stop altogether. Lebanon, Mozambique and Venezuela have all been in default for more than three years; none has even managed to started negotiations.

More countries now borrow from their own banks and populations in their own currency. Sri Lanka and Zambia face the formidable challenge of restructuring this domestic debt in order to keep their international deals moving forward. This requirement is, perhaps, the only thing in international finance on which China, the IMF and Wall Street can agree. A light touch will not satisfy the IMF. Too heavy, and the banking system will crash.

So it is hardly surprising that many countries on the brink of restructuring, such as Pakistan and Sri Lanka, are clinging to the pretence of solvency however they can, often with unstable dollars deposited by China or Gulf countries in their central banks. But the developing world is engulfed in the worst debt crisis since the 1980s. Ignoring insolvency has steep costs too. It makes restructuring, whenever it is done, more painful. But, with restructurings frozen, in 2024 that will seem to many countries like a price worth paying. ■

Cerian Richmond Jones, International economics correspondent, The Economist