Are Western Banks Blocking Debt Relief for Poor Countries? – TRT world | Vette Leader

Private Western creditors are under pressure to haircut their debt as China and the Paris Club agree to solve Zambia’s external debt crisis.

Millions of people in heavily indebted, low-income countries continue to suffer from a lack of basic services while their financially strapped governments wait for private creditors from wealthy countries to restructure bad loans.

Chad, Ecuador, Ethiopia, Ghana, Sierra Leone and Sri Lanka are among dozens of countries hit by the pandemic and the Ukraine conflict, which has pushed up food prices and drained government coffers.

Low-income countries had $860 billion in debt at the end of 2020, says the World Bank.

A significant portion of the debt is owed to Western financial institutions, including banks and asset management firms, that seek to make handsome profits on their loans.

An international effort to offer aid to governments at risk recently received a shot in the arm when China and France agreed to tackle the external debt of Zambia, the African copper producer, which defaulted on a loan installment in November 2020.

“The case of Zambia is significant because there were tensions between eastern and western creditors in previous debt negotiations,” said Christopher Vandome, a research fellow at Chatham House’s Africa programme TRT world.

In debt-stricken Argentina, protests erupted last month after lawmakers agreed to request an IMF bailout that would require a significant cut in government spending. (AP)

France is part of the Paris Club, a group of rich creditor countries including the United States and Britain. The club was wary of proceeding with debt relief, fearing it would ultimately benefit Chinese companies, which have been funding infrastructure projects in low- and middle-income countries at a fast pace over the past decade.

On the other hand, Beijing feared that the money would flow to Western financial institutions in the event of a debt haircut – waiving part of the principal and interest payments.

This suspicion between the two sides had stalled debt relief negotiations that began under the Debt Service Suspension Initiative (DSSI), a G20-led initiative that started in 2020.

But DSSI failed to deliver the results hoped for and was replaced last year by the so-called Common Framework, under which wealthy countries, including China, have been trying to find ways to help poor countries weather tough economic conditions.

Although France and China have not disclosed details of the deal or debt relief, developments have opened up other avenues for Zambia to borrow on concessional terms.

The International Monetary Fund (IMF), which has been negotiating a $1.4 billion loan with Zambia, will be more inclined to release the funds after the Paris Club and China come to the table, Vandome says.

While official and multilateral creditors, which include governments and institutions like the World Bank, have been open to the idea of ​​debt relief, private creditors have not shown similar enthusiasm.

Western private creditors like BlackRock are under pressure to forgive some poor country debt.

Western private creditors like BlackRock are under pressure to forgive some poor country debt. (debt justice)

According to a recent study, official bilateral creditors delayed $12.9 billion in capital repayments between May 2020 and December 2021, giving low-income countries breathing space Foreign Affairs Article.

“Unfortunately, only one private creditor chose to participate in the initiative and only low-income countries were eligible,” it said. This means that Sri Lanka and Pakistan, which have seen their foreign exchange reserves plummet in recent months, cannot benefit from the procedure.

Contrary to popular belief, low-income countries are not so much indebted to China as they are at the mercy of BlackRock, the US-based wealth management giant.

In a study released in July, Debt Justice, an NGO that campaigns for greater credit relief for poor countries, said the African government’s external debt to China is about 12 percent, compared with 35 percent to private western banks.

“In addition, interest rates on private loans are almost double those on Chinese loans, while the debt of the most indebted countries is less likely to be dominated by China,” it said.

According to a study, African countries owe around 132 billion dollars to private creditors. A decade ago, loans from private lenders were insignificant.

Debt relief lobby groups have long proposed that low-income countries stop making payments to creditors, including the private sector.

But private creditors, backed by rating agencies, often employ fear-mongering tactics to discourage governments from withholding interest payments.

“Zambia seems to be the case where these negotiations are working. Whether this also applies elsewhere is another question. But certainly everyone involved has high expectations to show that this process works,” says Vandome.

“Now the pressure on private creditors will increase. I think things are in a very good position to be part of the broader conversation.”

Source: TRT World

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