MNI INTERVIEW: Trichet-China May Join Poor Nation Debt Plan

China is likely to eventually join other sovereign lenders including the Paris Club in working out debt relief for poorer nations, as attempts to negotiate with borrowers by itself will be rejected by other creditors, former European Central Bank President Jean-Claude Trichet told MNI, warning that failure to reach a deal could lead to defaults.

"China is not yet on board to join the consensus on applying the principles of transparency, comparability of treatment and equal burden sharing when dealing with public credit rescheduling," Trichet said in an interview late Friday. "These principles are in the interest of all, including China: we cannot defend utilizing public money helping countries by rescheduling or debt alleviation of whatever kind, if it serves only to repay other creditors, whether public or private."

"I am reasonably optimistic, because it is common sense and in the interest of all," he said. "There is a joint interest in sticking to those principles that are embedded in particular in the Paris Club principles."

The G20 last month agreed to extend a debt relief program for poorer nations and made some progress on further action before another session scheduled this month. China held about USD100 billion of loans to low-income nations in 2018, followed by USD60 billion for bondholders and USD40 billion from governments that are part of the Paris Club of lenders.

MINIMUM REQUIREMENT

Global investors have questioned whether China is playing hardball on some of its loans behind closed doors and may be seeking special concessions, making it more difficult for a global agreement on refinancing to nations like Zambia. "China will continue to act on Chinese and African leaders' consensus and the G20 DSSI to handle debt issues of Zambia and other African countries," foreign ministry spokesman Zhao Lijian said at an Oct. 21 press conference.

The world economy faces a prolonged social and economic crisis unless there is further action to stabilize nations lacking the fiscal power to control the pandemic, Trichet and former Mexican central bank chief Guillermo Ortiz said in a recent paper for the Group of Thirty. That paper also called on the world to provide further aide including USD1 trillion in IMF resources via its Special Drawing Rights.

"Taking into account what we know today, that would be clearly appropriate," given downside risks to the global economy, Trichet, a former leader of the Paris Club, said of the proposed IMF package.

Asked about the potential for outright debt forgiveness or sovereign debt defaults, Trichet said nothing can be ruled out at this point. "The situation is extremely grave," he said when asked about debt forgiveness. On potential defaults, "some countries may simply say I'm sorry I cannot continue to repay the debt, and that triggers the negotiations and the discussions," he said.

CONSENSUS AFTER U.S. ELECTION?

The U.S. has a role to play and its elections may bring more willingness for an international solution with the SDR funds, Trichet said.

"With the present U.S. administration it seems very unlikely. With a new U.S. administration, it is much less unlikely, but it is not for sure," he said. "Because it is a difficult decision to take: it would call, at the same time, for a reallocation of these SDRs in order to help the countries in major difficulty, and you have of course always in the Congress some resistance vis-à-vis the international institutions in general."

"The question of whether or not we will have a consensus at a global level to do that is of course an open question."