How Covid Fuels Debt Crisis Among Global Have-Nots

(Bloomberg) -- The pandemic has taken its heaviest toll in some of the world's poorest countries, in terms of both health and economics. Indebted governments from Latin America to Africa have spent money they didn't have to shore up rickety health systems and provide a safety net for citizens, pushing their finances further into the red. Amid signs that financial pressure is fomenting political instability, there are calls to ease the strain on those struggling to service foreign debt.

1. Which countries are in trouble?

Latin America accounted for almost a third of the world's Covid-19 deaths by mid-2021, even though it's home to just 8% of the global population. Argentina, Belize, Ecuador and Suriname all defaulted on their borrowing during the pandemic, sparking comparisons to the region's so-called Lost Decade of the 1980s, when heavily indebted countries fell like dominoes into protracted recessions. In sub-Saharan Africa, where 40 million people could slide back into poverty because of the pandemic, Zambia defaulted last year. Ethiopia and Chad were trying to rework their obligations. All told, about a half-dozen or so countries, including Sri Lanka, have dollar-denominated bonds that were trading at yields in excess of 10%, a sign of distress.

2. Who's trying to help?

Led by the U.S., richer nations created trillions of dollars in new money through bond-buying programs during the pandemic and were funneling a small portion of that to poorer countries through multilateral institutions. The Group of 20 major economies temporarily waived payments three times on official government-to-government borrowings for the world's poorest countries, mostly in Africa, extending a so-called debt moratorium until the end of 2021. The International Monetary Fund approved more than 80 nations for emergency financing. It's also preparing to offer member countries the biggest resource injection in IMF history, $650 billion in so-called special drawing rights, a reserve asset that works like an overdraft and comes with no conditions, unlike most of the fund's other programs.

3. How big a problem is this?

It's a huge problem and could be getting much worse. While some nations — Argentina, Lebanon, Venezuela and Zambia among them — were struggling to pay their debts long before Covid-19, the lockdowns decimated many others. With waves of infections and shortages of vaccines and hospital beds, economists generally agree that the pandemic has exacerbated inequality both between countries and within them. Latin America's economy contracted 7% last year — more than double the decline of any other region — with an additional 22 million people there unable to meet basic needs. Governments from the developing world sold more dollar- and euro-denominated bonds last year than in any year on record, according to data compiled by Bloomberg. Verisk Maplecroft, a risk consulting firm, predicts that the combination of higher debt burdens and public anger about the government response to the health crisis means that political instability could rise in at least 88 of the 130 nations it tracks.

4. What will it take to defuse a blowout?

Governments pulling their economies out of a deep hole have to maintain a delicate balance. They can be faced with the choice of either keeping critical aid flowing or keeping creditors paid. There are political considerations, too. In Colombia, attempts to increase taxes to rein in a ballooning budget deficit and stave off a credit rating downgrade sparked deadly street protests in May, leaving at least 20 people dead and forcing policy makers to retreat. Last year, Nigeria's business hub of Lagos was the site of protests against police brutality that morphed into a nationwide uprising about soaring unemployment and high food prices that left at least 69 people dead.

5. What are the biggest hurdles?

While there are calls for more debt moratoriums, the G-20 has said it won't extend its halt on payments beyond the end of the year. What's more, forging agreements on relief will increasingly hinge on China, which has become the world's largest official creditor and was owed almost 60% of the bilateral debt that the poorest nations were due to repay in 2020. China says it has given relief to nearly two dozen countries, while complaining that private creditors and multilateral lenders like the World Bank haven't done enough. Failure to make debt payments can close off access to capital markets, making a comeback even harder. Ethiopia, for example, has signaled that it won't ask bankers and bondholders for the same relief granted by state lenders such as Italy and France, for fear of alienating the financial community. The Paris Club, an informal group of wealthy nations that has bailed out governments for decades, has joined forces with the G-20 to rework the debt of poor countries alongside China and private creditors.

The Reference Shelf

How the pandemic drove a global government borrowing binge, pushing indebtedness to historic levels.
How the Paris Club is trying to reclaim its lost influence.
A QuickTake explainer on the IMF's special drawing rights.
The Council on Foreign Relations looks at how low-income countries can cope with “coronavirus debt.”
Even investors who make their living in risky emerging-market assets were scrambling for safety.
George Soros, writing in Bloomberg Opinion, called for “a comprehensive debt standstill” lasting a year or more.