World is failing to act on looming debt crisis

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Contributed by Joe Montero

One of the biggest problems in the world today is enormous debt burden faced by poor nations. Most of the loans have been provided by the International Monetary Fund (IMF) and financed by American and British banks. Debtor poor countries face a total of $35 billion in debt-service payments.

A key study by a consortium of charities based in the United Kingdom (Christian Aid) finds that debt is causing great harm to people when resources are diverted to paying off this debt instead of providing for the needs of citizens. The study calls on governments to do more to pressure the private sector, which provides the loans, to do more to ease the burden.

According to the World Bank, the debt of low and middle income countries in 2020 was $8.7 trillion and increasing at around 8 percent per year. Covid then hit and the debt has grown at a faster rate.

In recognition of the developing crisis, the G20 group of the biggest economies agreed on paper two years ago to provide a swift and comprehensive  overhaul to remove the crippling burden. It remains an agreement on paper. Nothing has been done to change anything.

Part of the reason for recognition of the problem in the first place was that a growing number of the affected nations have been turning towards China, which offers cheaper loans and better repayment options. The World Bank estimates that 40 percent of loans to nations are now provided by China. Sometimes, and this is happening more often now, the debt is reduced and or even scrapped.

This is seen as a threat to traditional lenders and the legitimacy of the west dominated international financial system. But even with this perceived challenge, there remains a telling incapacity to act on the promise made two years ago.

The problem is that this is business for private investor banks and governments are loathe to do anything that might adversely affect their bottom line. In other words, these banks do very well out of creating debt and have enormous influence over the politics of their home nations. Governments and officials will not challenge this power.

There is more. Although the price of their debt is high on poorer populations, from the standpoint of the global economy, the bigger problem is the rising debt of the world’s richer nations. There has been an explosion here. Their share of the total $303 trillion is huge, and there is little prospect of this being paid back in a hurry.

It is made all the worse because most of this goes to financial private institutions and little of it to grow the economy and generate the means to pay off the debt. In these circumstances, there is even less incentive to help poorer nations.

But unless this debt problem is resolved, the global economy will continue to spiral downwards.

Debt owed to American financial institutions and aided by the Fed’s expansionary monetary policy is pushing up the exchange rate of the United States dollar, and this is creating even more debt and the exchange values of other currencies fall. They are forced to pay back more.

Something has to give to avoid disaster. Its either a global agreement on debt relief or risking the meltdown of the financial system. The second option would be a nightmare for the global economy and create a new explosion of poverty within nations.  

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