MNI INTERVIEW: US, China May Cede on Poor Nation Debt-Ortiz

The U.S. and China are likely to give concessions ensuring a smoother refinancing of a USD200 billion pool of debt from poorer nations struggling to contain Covid-19, Mexico's former central bank chief and finance minister Guillermo Ortiz told MNI.

American misgivings about coordinating the needed resources through the World Bank and IMF may soften if Joe Biden wins next week's election, Ortiz said in an interview. President Donald Trump has criticized groups like the World Bank and Biden may ease fears about a veto of global debt relief, Ortiz said. That's a vital step before a G20 meeting next month on plans for a more transparent framework on debt restructuring beyond the current agreement to suspend repayments for another six months.

China may also step back from its preference for opaque case-by-case restructurings that alienate other government and private lenders worried their repayment terms are being quashed, Ortiz said. It's also in a position to do so as the only major economy expected to grow this year, and the government could also earn goodwill after the pandemic hurt its prestige, he said.

"China's willingness and ability to be more cooperative in terms of its engagement with low income countries will be more forthcoming in the next few months," Ortiz said. "It would be a long stretch to ask some countries for cooperation to engage in debt alleviation when those resources are going to be used to pay those other creditors, including China's agencies, that hold liens on natural resources in some African countries. I think this is a key point, the call for transparency."

K-SHAPED DECADE

The global economy faces years of a dangerous K-shaped recovery if poorer indebted governments can't raise more money to tackle Covid-19, Ortiz said. Nations with 70% of the world's population are receiving World Bank support to fight the pandemic, and about half of poorer nations are at high risk of debt distress or already in it. Moving now on a broad agreement including loan transparency is vital to prevent a worse reckoning on debts in the future, he said.

"It's much better to re-profile in advance of a huge financial need, in the middle of a crisis," he said. "The chances of this happening if you have a strong Biden win would be much enhanced."

While true cooperation between the U.S. and China seems remote, the stakes are high. Ortiz helped lead a paper for the Group of 30 that said "a lost decade of growth in large parts of the world remains a plausible prospect" without a debt fix. No Sub-Saharan African country has borrowed in the international capital markets since February 2020, according to the paper.

China held about USD100 billion of loans to low-income nations in 2018, according to the G30 paper. That's followed by USD60 billion for bondholders and USD40 billion from governments part of the Paris Club of lenders.

BETTER ATMOSPHERE

Zambia may soon become the first nation to unilaterally default on its debts during the pandemic, according to Capital Economics. The World Bank lists other nations in high distress, including Kenya with the largest potential savings from the debt suspension program at USD631 million or 0.7% of its 2019 GDP.

Refinancing troubles may persist for years like in the 1980s, Ortiz said, so having a broad plan in place now is the key need to tackle specific requests for extending repayment terms, potential debt write-offs or other solutions.

"If they do so and China cooperates, I think we will see a better international atmosphere for 2021 in terms of the treatment of the debt problem," he said. The G30 said the IMF should advance two parcels of Special Drawing Rights worth USD500 billion each to boost global reserves.

The G30 paper said "we reject the view that the worst of the crisis has passed," and Ortiz said in the interview it's not even obvious that even the U.S. ever really overcame the first wave of the pandemic.

U.S. AND MEXICO

Ortiz was a lead negotiator of the original Nafta trade pact with the U.S. and Canada, and said the presidential election may be less consequential for bilateral relations with Mexico than the previous one.

President Trump in some ways made peace with Mexico by calling the revised trade pact a great deal, while Democrats may push harder on enforcing labor standards, Ortiz said. "I don't think it makes a huge material difference for Mexico who wins the next election," he said. "The same goes for Canada."