Debate over debt at the IMF reflects rift between China and the West
By Leon Hadar
THE fragmentation of capital flows along geopolitical fault lines and the potential emergence of regional geopolitical blocs could have large negative spillovers to the global economy,” International Monetary Fund (IMF) researchers concluded in a paper issued on the eve of the IMF-World Bank spring meetings last week (Apr 10-16).
Indeed, as finance ministers and central bank heads gathered in Washington, DC, it was becoming clear against the backdrop of a growing Sino-American rift how difficult it would be to stabilise the global economy at a time when the pressure to decouple their economies affects key industries, such as high technology.
At the same time, cross-border investment flows now seem to reflect geopolitical alignments. Rival economic blocs have emerged to replace the integrated global market of the post-Cold War era of globalisation, which was rooted in turn in the Bretton Woods system, established after World War II. The goal of Bretton Woods was to establish macroeconomic stability on the basis of Western capitalist principles.
More specifically, the tensions between China and the United States and its Western allies have made it difficult to resolve a global effort to restructure hundreds of billions of dollars of debt owed by poor countries as China – which has lent more than US$500 billion to developing countries through its lending programmes and has become, for all practical purposes, the world’s single largest government creditor – seems to resist accepting a proposed Western sovereign debt restructuring programme.
The problems of at least 21 poor nations including Sri Lanka, Zambia, Ghana and Ethiopia have been compounded by rising interest rates and the disruption of supplies of food and energy resulting from the war in Ukraine. The Western proposal would allow them to restructure their debt and reduce the amount they owe and ease their financial difficulties.
In the past, negotiations between Western countries in the “Paris Club” of creditors have led to a smooth process under which the loans to the borrowers were written down. But China – to which at least 65 countries owe more than 10 per cent of their external debt – has refused to join the club and play the game. It has resisted calls to “take a haircut”, that is, to cut the face value of its loans, and instead has struck much tougher bargains with troubled borrowers.
The Group of 20 nations in 2020 established a debt relief process, also known as the “Common Framework”, aimed at benefiting the world’s poorest borrowers. But the Chinese have insisted that other government lenders, as well as the IMF and the World Bank, take losses on their loans, before they agree to do so.
But these institutions tend to charge below-market interest rates, while China’s lending at an average interest rate that’s twice the IMF and World Bank figures. That, Western critics argue, is part of an effort to gain more influence over borrowing nations.
The Chinese, on the other hand, blame the US and the West for trying to maintain a system that secures their interests and those of their financial institutions. US Treasury Secretary Janet Yellen recently criticised China’s lending practices, saying that they left many poor nations “trapped in debt”. “The impacts of debt crises do not respect boundaries; they can have cascading effects on the global economy,” she asserted last week.
“We have worked very hard to get the Chinese leadership to recognise that with more wealth comes more responsibility,” said Kristalina Georgieva, managing director of the IMF, an institution over whose board the US holds veto power. That explains why the Chinese see the IMF as continuing to be dominated by the Americans. For years, the Chinese have complained that the West has refused to give them greater say in the operations of the IMF and the World Bank.
Indeed, the concern is that without Chinese cooperation, the IMF and the World Bank would further evolve as a lending arm of the democratic West while China becomes, through its financial institutions, a separate international emergency lender for the developing world.
Such a development could mark the end of the Bretton Woods system, which was supposed to usher in an era of international economic policy that reflected liberal universal values, and instead launch an age when geopolitics would determine the rules of economic cooperation.