“A big country that is likely to buckle first is Turkey,” he said. OIl producing countries are also in trouble.Desmond Lachman
The International Monetary Fund on Thursday urged countries to take swift action to avert a global debt crisis that outside experts think is inevitable.
In a series of public events Thursday, IMF officials were not so fatalistic. They noted that easy monetary policy from the Federal Reserve and other central banks has bought debt burdened middle income countries some time.
Still, IMF First Managing Director Geoffrey Okamoto said Thursday a pandemic-induced systemic debt crisis “cannot be ruled out.”
“The longer the problem is postponed, the worse it will become,” Okamoto said, in a speech to the Peterson Institute for International Economics.
Desmond Lachman, an expert on international debt at the American Enterprise Institute, thinks there is no way to avoid a debt crisis.
“The problem in a nutshell is that emerging economies went into the crisis with record debt levels and now we’ve had the worst economic recession in 90 years. How that’s not going to lead to a crisis, I don’t know,” Lachman said.
Other experts , notably Ken Rogoff of Harvard University agree the riskiest period lies ahead.
The trouble started in the wake of the 2008 crisis, when the Fed cut interest rates to zero. Emerging market companies had no trouble borrowing funds. Investors didn’t care about the details, wanting simply to earn more interest than they could get on U.S. Treasurys, Lachman said.
These private debts are expected to migrate onto the balance sheets of countries as the crisis unfolds, he said.
Now there is a “perfect storm” as commodity prices have plunged, export markets are drying up and expatriates are no longer sending money back home in the form of remittances, Lachman said.
The new round of Fed monetary policy support to combat the coronavirus pandemic has limited the shock to the poorest countries.
Lachman said that as soon as markets go to a risk-off posture, “you are going to see these countries crumbling,” he added.
“The real problem is going to be Latin America,” Lachman said.
“The place that I’m worried about is Brazil, where their budget is out of control,” he said.
“A big country that is likely to buckle first is Turkey,” he said. OIl producing countries are also in trouble.
The total external debt is roughly $3.5 trillion, he noted.
In the 1980 Latin American debt crisis, a “handful” of banks were the creditors and so a deal could be reached to restructure the debt, Lachman said. This time the private debt is widely held and is “hugely messy.”
Another wildcard this time is that many countries borrowed from China.
So Western governments don’t want to write down their loans to emerging market countries just to have them turn around and use the Western funds to pay back their Chinese loans, Lachman explained.
“The world is at a critical juncture and should not sit idle waiting for a crisis,” said IMF Managing Director Kristalina Georgieva, in a blog post.
She asked the G-20 to extend a debt moratorium for the poorest countries through 2021. It was set to expire at the end of this year.
And Georgieva urged countries to begin to restructure debt that was unsustainable.