The US and China are in discussions to proactively address the potential wave of sovereign defaults in emerging markets, sources familiar with the matter revealed. This marks a significant effort in economic collaboration between the two rival superpowers.
The discussions encompass various strategies, including extending loan repayment periods before countries default, with the overarching goal of alleviating the substantial annual debt service burden exceeding $400 billion for poorer nations and mitigating their high borrowing rates in the market.
Proposals under consideration involve not only extending repayment timelines but also increasing funding from institutions like the World Bank. The aim is to implement these measures preemptively, before countries reach the point of default and formal restructuring talks with creditors.
Any joint proposal on global sovereign debt issues by the US and China would likely necessitate support from the full Group of 20, as well as from the International Monetary Fund and the World Bank, entities that have grappled with resolving global debt distress since the onset of the pandemic.
Ultimately, the involvement of private creditors, who hold a larger share of emerging market sovereign debt and anticipate a greater role in negotiations, would be crucial.
According to some sources, the objective of these discussions is to present a proposal to G-20 leaders during their meeting in Rio de Janeiro in November. However, another source cautioned that the talks are still in early stages, and it remains uncertain whether they will yield tangible outcomes. These discussions were disclosed anonymously to protect their confidentiality.
The US Treasury Department refrained from confirming specific details of the talks but acknowledged ongoing dialogue with China on sovereign debt concerns. Meanwhile, a Chinese Foreign Ministry spokesperson emphasized China’s commitment to addressing debt issues in developing countries through both multilateral and bilateral channels. Requests for comment from the Ministry of Finance in Beijing went unanswered.
Debt Deadlock
A collaborative effort between the US and China would represent a significant breakthrough, given their dominant roles in shaping debt resolutions for many nations. The US wields substantial influence over the global financial framework through its sway at the IMF and World Bank via the Treasury Department, while China holds considerable sway as the largest creditor to developing nations, effectively possessing veto power over numerous deals.
These discussions come amidst mounting concerns over the sluggish pace of restructuring talks for countries such as Zambia and Ghana, both currently engaged in the Common Framework—a debt restructuring initiative launched in 2020 by the G-20, World Bank, and IMF. The framework aimed to convene traditional lenders from the Paris Club alongside emerging creditors like China and private sector stakeholders.
However, criticism has mounted against the framework for its lethargic progress, leaving defaulting countries in limbo for extended periods and deterring others teetering on bankruptcy from seeking assistance due to the arduous process.
For instance, Zambia defaulted in 2020 and has yet to finalize a debt overhaul, experiencing setbacks in restructuring over $3 billion of debt due to disagreements between Beijing and bondholders.
Discussions between the US and China commenced before the November meeting between Presidents Biden and Xi and have persisted into the current year. Debt issues were also on the agenda during US Treasury Undersecretary Jay Shambaugh’s recent visit to Beijing.
Over the past decade, Beijing has emerged as a significant creditor to developing economies, largely through Xi’s Belt and Road Initiative, which focused on infrastructure development. However, it remains uncertain whether the proposed US-China plans would extend to middle-income nations like Pakistan and Egypt or concentrate solely on low-income countries, aligning with the scope of the Common Framework.
Developing nations faced a record $443 billion in debt service payments in 2022, posing a severe risk of tipping them into crisis and fostering a “lost decade” of economic stagnation, as warned by the World Bank. Approximately a dozen developing nations are in default or experiencing bond trading levels indicative of impending payment defaults, according to Bloomberg data.
While international capital markets have begun to reopen for some emerging-market borrowers, the rates offered are likely to exacerbate budgetary strains. For instance, Kenya recently issued $1.5 billion in notes with a coupon rate of 10.375%.
