Credit Crisis Looms
The economic damage wrought by politicians’ responses to the virus pandemic is feeding a debt crisis in emerging nations.
Ecuador, dependent on oil exports, has asked creditors to restructure its debts. Zambia, among Africa’s biggest copper producers, has delayed payments on its eurobonds and Chinese loans, sinking bond values. Argentina has postponed negotiations about restructuring its $83 billion in debt until the virus-related crisis has passed.
Less-developed countries piled up $3.2 trillion in total debt last year, about 114 percent of their collective annual economic productivity, according to the Institute of International Finance.
By the end of 2021, those countries are scheduled to repay $2.7 trillion in other debt.
Few expect those commitments to be met.
The countries were counting on sales of raw materials to industrialized countries for cash flow to meet their bills. But with factories shut down across the globe and the world drowning in excess oil, these countries’ revenues have dwindled to a trickle.
Also, the dollar has strengthened and is being bid up by companies and countries wanting to protect the value of their assets. That makes it more expensive for poor countries to pay their dollar-denominated debts.
Much of that debt was raised through bond sales floating on the cheap money offered by central banks. Now, thanks to the current economic pandemic, those bonds have lost 15 percent of their value during 2020’s first quarter, about twice what they lost at the beginning of the Great Recession.
Investors bailed out of about $31 billion of the countries’ bonds in March, the biggest exodus since October 2008.
The nation’s problems will get much worse, many analysts think, because these economic blows are falling before the COVID-19 illness has taken hold in the countries.
“Everything that was weak before the crisis is now getting destroyed,” said the manager of an emerging markets hedge fund. “The dominoes are starting to fall.”
On 27 March, Goldman Sachs warned the South American economy is “about to hit the wall” and suffer its worst recession in more than 70 years.
The UN has called for $1 trillion in debt forgiveness for the countries, $1 trillion in new loans from the International Monetary Fund, and $500 billion in support for the countries’ health care systems.
Meanwhile, developing nations’ central banks are beginning to adopt the familiar measures of lowering interest rates and buying government bonds at premium prices to drive down interest rates.
TREND FORECAST: Emerging markets were submerging before the coronavirus economic clampdowns.
As conditions continue to deteriorate, crime, violence, protests, riots, and demonstrations will dramatically escalate… despite government repressive measures. As a result, refugees will flee to escape war-torn, poverty-stricken nations as civil unrest escalates into civil war.
