How Germany Can Cope With The Global Sovereign Debt Crisis – Economy and Ecology

The sovereign debt levels of many developing countries are alarming. After the spring meeting of the International Monetary Fund (IMF) and the World Bank in April, German Finance Minister Christian Lindner announced that Germany would provide additional financing for new loans. Beyond that, Germany should use its G7 presidency to specifically push for a sustainable sovereign debt restructuring mechanism – as agreed in the coalition agreement.

The high sovereign debt levels of many developing countries, which have increased further in recent years, pose the threat of a global sovereign debt crisis. This is currently one of the greatest macroeconomic risks for developing countries. There are many reasons for this: large loans were contracted towards the end of the 2010s. To combat the consequences of the Covid pandemic, recourse was had to budgetary stabilisation. The G7 countries are currently conducting a monetary policy that attempts to curb inflation. The Russian war of aggression in Ukraine further aggravates the situation.

In 2020, the debt-to-GDP ratio of developing countries fell from an average of 57% to 69%.

In the wake of the covid pandemic, many countries’ sources of income have been massively reduced by disrupted supply chains, restricted tourism, capital flight and weak remittances. In 2020, the debt-to-GDP ratio of developing countries fell from an average of 57% to 69%. A first payment default shows the extent of this: in the fall of 2020, Zambia was no longer able to meet its debts.

The Russian war of aggression in Ukraine once again highlights the heavy dependence and vulnerability of developing countries. Rising food, energy and fertilizer prices, along with the further disruption of supply chains, are already having a devastating impact. Inflation, slowing trade growth, rising interest rates and the strength of the US dollar are exacerbating fiscal pressures. According to World Bank President David Malpass, more than 60% of low-income countries are currently considered to be at acute risk of debt crisis.

A lasting solution to the current debt levels of developing countries is economically, geostrategically and morally appropriate and essential.

Revise the existing framework

From an economic point of view, debt is neither good nor bad in itself. It can promote growth and investment and have a countercyclical balancing effect. However, excessive debt levels pose risks to growth and stability and restrict fiscal space. To date, there is no fair and effective procedure for restructuring sovereign debt at the international level. The Common Framework of the G20 countries adopted in 2020 is a first – but not sufficient – step.

The common framework aims to give countries the possibility to negotiate the subsequent treatment of unpaid debts in case-by-case procedures. It is essential that each case be treated separately. The debt and creditor structures of different countries are very different and require careful consideration. Although the importance of China and private creditors has increased significantly over the past decade, their relevance is highly dependent on the specific country context. The reluctance of the G7 countries to push for a systematic restructuring mechanism should therefore not be justified by the role of China.

Less than two years after its creation, the IMF and the World Bank are already calling for a revision of the Common Framework. This could be a step in the right direction: the aim must also be to systematically and legally include private creditors and to extend the framework to other highly indebted countries, for example among emerging economies.

The geostrategic importance of a sustainable mechanism was not only clearly established by the March 2 UN resolution condemning Russia’s war of aggression, which was not supported by several developing countries, among others. Putin’s summit with African heads of state in Sochi in October 2019 painted a clear picture of Russian interests in and with Africa: it focused on the sale of Russian nuclear weapons and technology as well as on military-technical cooperation. In this context, it is more important than ever to support democratic partner countries which are facing destabilizing circumstances due to unsustainable debt levels. From the point of view of multilateral cooperation within the Bretton Woods system, a sovereign debt restructuring mechanism in which creditor and debtor countries agree to find a constructive solution is in Germany’s interest.

Last but not least, a lasting solution that thwarts the risk of sovereign debt crises in developing countries is simply morally imperative. People in the poorest countries are the hardest hit by the global economic downturn. Without decisive and coordinated action, the risk of a real debt crisis in developing countries increases. And with that, hunger, poverty and inequality will only get worse.

Long-term rather than short-term commitments

High indebtedness was the subject of intensive discussion at the Spring Meeting of the IMF and World Bank in Washington, DC, in mid-April. German Finance Minister Christian Lindner has announced that Germany will lend €6.3 billion to the IMF’s new Resilience and Sustainability Fund and another €100 million to the Disaster Reduction Fund. poverty and growth for interest rate relief. Action must be taken now, Lindner stressed, warning of a “global debt crisis.”

It would be more important than the additional loans announced by Christian Lindner to give seriously indebted countries access to a codified mechanism for restructuring their sovereign debt.

The new short-term commitments of the German Federal Minister of Finance are to be welcomed. However, other loans only give short-term respite and do not solve the problem. It would be more important than the additional loans announced by Christian Lindner to give seriously indebted countries access to a codified mechanism for restructuring their sovereign debt.

In the coalition agreement, the traffic light coalition agreed to work towards a new consensus on international debt management. An international sovereign insolvency procedure, which includes all creditors and provides debt relief for particularly vulnerable groups of countries, must also be supported.

This objective must be achieved as soon as possible. It should also be integrated into the strategy of German development policy, so that restructuring agreements with partner countries are accompanied by capacity building programs for ministries of finance and central banks as well as the promotion of good financial governance. German development cooperation is already well placed to do this and can, together with the G7 countries, create an attractive offer.

With the G7 Presidency, Germany now has a special opportunity to get the ball rolling. Finance Minister Lindner should use the meeting of G7 Finance Ministers and Central Bank Governors to push for the further development of the Common Framework and to establish a permanent and comprehensive sovereign debt restructuring mechanism. As the second largest donor in the world, Germany should clearly play a leading role.

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