China paralyzes the Bretton Woods institutions

Opening the spring meeting of the International Monetary Fund and the World Bank in Washington, IMF CEO Kristalina Georgieva warned that 27 countries were at risk of default and another 26 on the “watch list.” The fateful sum of the rise in interest rates and the pandemic had already pushed 21 countries, including Sri Lanka and Malawi, to suspend payment on their external debt or request its restructuring.

In general, this last phase coincides with falls in foreign exchange reserves, high inflation and capital flight. Those 21 countries, home to 718 million people, owe $1.3 trillion, an average of 93% of their GDP. Since the 1980s, there has not been a debt crisis of these dimensions in terms of the size of the world population affected.

According to Debt Justice, in 2023 the external debt maturities of the poorest 91 will absorb 16% of their government revenues and 17% in 2024, the highest figures since 1998. In 2011 it was only 6.6% .

An additional problem is that the current restructuring processes, which almost always involve haircuts (haircuts), are almost paralyzed. In 2020, Zambia entered default. Since then it has been in a kind of financial limbo, unable to receive a dollar from the IMF while the moratorium increases its debt.

This year, the Sri Lankan government will have to dedicate 75% of its income (27% of GDP) to paying off its internal debt, three times the amount it owes to its external creditors (9.8%), to which it stopped paying in 2022. Pakistan is another of those condemned in financial purgatory: its external debt is equivalent to 28% of GDP and its internal debt to 37%.

when the dragon slays

Zambia, Pakistan and Sri Lanka share a common denominator: their debt to China. Of the $20 billion of Zambian debt, the lion’s share ($6 billion) is owed to the China Development Bank and other Chinese state banks. At least 65 countries owe them more than 10% of their foreign debt.

In 2006, the Asian giant had only 2% of the external debt of 73 developing countries while the Paris Club, which coordinates the creditors of rich countries, had 28%. They were different times. In 2020 those figures had turned around: 18% and 10%, respectively.

Beijing has accepted, in principle, a cut in Zambian debt but has done nothing to make its offer come true. According to analysts, the impasse It is because Beijing does not want its money to end up in the hands of private creditors or the IMF, which it accuses of not wanting to assume its share of any losses if it cancels part of the debt.

Like the World Bank, the IMF, the cornerstone of the Bretton Woods system (designed in 1944 by John Maynard Keynes and Harry Dexter White) enjoys the status super seniorwhich shields them at the time of restructuring.

financial eat

The problem is that the other creditors of Lusaka (multilateral entities, international bondholders…) do not want to do anything that benefits the Chinese banks either. According to comments off-the-record a senior government official in Beijing to Financial TimesIf the IMF and the World Bank want to take precedence over their banks, they must give them greater voting rights on their boards.

If the situation is not unblocked, China’s refusal to engage in coordinated collective efforts may undermine the foundations of multilateral institutions. Unlike the rules that govern bankruptcy and bankruptcy proceedings in national legislation, at the international level there is nothing similar for insolvent countries, only tortuous negotiations ad hoc in which contractual factors and geopolitical conveniences intervene.

When the Paris Club, with the advice of the IMF, managed the process, the results took time but in the end they arrived due to the pressure exerted by the governments on the private creditor banks. In 1995, Washington, which has 17% of the vote, over Japan was so intense that Tokyo had to grant generous debt relief to Mexico.

In the 1990s, when bond markets replaced banks as a source of financing for emerging countries, coordination among creditors became complicated, with a myriad of bondholders demanding their rights.

Elephant in china shop

The Chinese irruption has been similar to that of the proverbial elephant in the china shop. Already in 2017 the credit portfolio of its banks exceeded that of the IMF and the World Bank together. Although it has since lowered its profile, the William & Mary’s Global Research Institute estimates that over the past decade, China has provided $843 billion in credit, mostly under its Belt and Road Initiative (BRI). its acronym in English).

In 80 years, the IMF has lent some $700 billion to 150 countries. A recent study by AidData, the World Bank, the Kiel Institute and the Harvard Kennedy School, estimated that between 2019 and the end of 2021, China granted $104 billion in bailout loans, a similar amount to that of the previous 20 years combined. .

“Chinese banks have a great advantage: unlimited patience to wait for favorable conditions”

Between 2000 and the end of 2021, it launched 128 rescue operations in 22 countries that totaled 240,000 million dollars, 185,000 of them since 2018. Between 2016 and 2012, these credits were equivalent to 130% of those granted by the IMF. Most of the time their terms are opaque and with strict confidentiality clauses. Beijing never reports its amount or terms to the IMF, the OECD or the Bank of International Settlements. The dragon hunts alone and at its own pace.

a different monster

As Bradley Parks, executive director of AidData, writes in Banking in Beijing (2022), China has made the global financial architecture less transparent, coherent and institutionalized. Chinese banks have a great advantage: unlimited patience to wait for favorable conditions.

The United States represents 58% of the G7’s GDP, compared to 40% in 1990. But as Thomas Friedman recalls in The New York TimesWashington knew how to deal with the Soviet Union, a military rival, but nowhere near an economic one.

China is a monster of another nature. Yu Jie, an analyst at Chatham House, attributes China’s stance to a long-term geopolitical calculation: control the debt of the Global South. According to Moritz Rudolf, an analyst at Yale’s Paul Tsai China Center, the “Chinese-style modernization” model, as Xi Jinping calls it, is far more attractive in the southern hemisphere than Washington DC’s Beltway realizes. China’s diplomatic strategy is not limited to rhetoric. In 2022, Beijing approved 22,000 million dollars in credits for Latin American countries.

But the dragon is treading on a mine ground. In 2010, only 5% of its loans went to countries with financial problems. In 2022 they were 60%, with what is now an uncomfortable position: that of an inflexible creditor.

Sri Lanka has only had its debt maturities extended by two years. His obstructionist attitude is complicating IMF programs in 20 other countries, including Argentina, Egypt, Pakistan and Ukraine. According to Carmen Reinhardt, a former chief economist at the World Bank, Beijing’s priority goal is to bail out its own banks, lending more to governments to get them paid.

On her visit to Lusaka in January, Treasury Secretary Janet Yellen called on China to forgive Zambia everything it owed. In Ghana (a country with a 100% debt-to-GDP ratio), however, instead of putting pressure on Abrdn or BlackRock, who own a significant part of the $13 billion of their bonds, to extend their service terms, Yellen just sent a technical adviser to Accra.

Irreparable defects?

In Africa, the US competes at a disadvantage with a country that offers bridges, roads, ports and financing to build them. Between 2007 and 2020, in the sub-Saharan region, China provided more infrastructure financing than the next eight lenders combined. In 2050, Nigeria, the most populous country in Africa, will have more inhabitants than the US, but today it generates less than 1% of its electrical capacity.

Reza Baqir, a former governor of Pakistan’s central bank, believes that the system’s flaws are already irreparable. Marco Rubio, a Republican senator from Florida, recently said that within five years there will be so many countries transacting in currencies other than the dollar that the US will not have the ability to sanction them.

In 2020, in response to the pandemic, the IMF reached an agreement at the G20 to freeze interest payments on the debt of low- and middle-income countries. But for the most part, he points out The Economist, its efforts to serve as a safety net for countries on the tightrope have been insufficient or irrelevant. 30% of its current loans have gone to a single country: Argentina. With Egypt and Pakistan, they absorb more than half of its resources.

With those numbers, writes Devesh Kapur in Foreign PolicyNo one should be surprised by the lukewarm criticism from the Global South of the Russian invasion of Ukraine, which sent energy and food prices skyrocketing. More than half of the foreign trade of India and Argentina is already with other countries in the southern hemisphere.

And now the IMF and the World Bank are going to have another competitor: the New Development Bank, the bank of the BRICS, which has been left in the hands of Dilma Rousseff, former president of Brazil.

Ajay Banga’s letters

At the World Bank, a lot will depend on what its next president, Ajay Banga, the former CEO of MasterCard between 2010 and 2020, does. During his tenure, he managed the stock market of the multinational financial services company from Purchase, New York, to 350,000 million dollars, raising it to Fortune 20.

Following an unwritten rule instituted in 1946, Banga, the 14th US citizen to hold the position, was the only “candidate” for the position. In a recent interview, Banga, who was born in Mumbai to a Sikh family, said inequality was inextricably linked to environmental problems and refugee crises.

In her last appearance before the Senate, Yellen said she hoped Banga would weaken China’s attempts to lure developing countries into a “debt trap.” But he warned that he would have to do it by using the bank’s resources better because he ruled out a new capital increase. Since 1944, he has only had five: in 1959, 1979, 1989, 2010 and 2018.

A panel created by the G20 recommended repealing in the World Bank’s statutes the limits of money that it can lend in relation to its capital (equity-to-loan ratio). If it fails to do so, warned its final report, the entity could suffer the same fate as the World Trade Organization (WTO), a victim of US sabotage and geopolitical conflicts.