A treasury official believes crucial emerging market debt relief is being unnecessarily delayed, with Belt and Road-type deals opaque and not transparent.
A US treasury official did not mince his words during a speech made Tuesday.
China has grown to become by far the largest bilateral creditor in the world, but it is not playing to the standard international playbook when the debts go sour, according to the prepared remarks made by Brent Nieman, a counselor to the US Secretary of the Treasury, at the Peterson Institute for International Economics, an American think tank.
Nieman indicated the clear imperative of following what is a tried and tested playbook given the «very difficult» situation in developing and emerging markets at the outset of 2022, when many governments were still trying to fight the effects of the COVID-19 pandemic.
Increasing Debt
According to him, debt levels jumped to comprise 64 percent of GDP at the end of 2021, up from 54 percent registered before the start of the outbreak. This situation has only been exacerbated by the Ukraine war, worldwide inflation, and the appreciation of the dollar.
A vast increase in loans and trade credits by China in recent decades has made it «by far» the largest official, bilateral creditor in the world but this has introduced new complexities in debt restructuring efforts.
A now-standard playbook for debt overhang, when the liabilities are not likely to be fully repaid, requires countries to reduce their external debt to make sure that borrowers do not stop or cancel necessary projects.
Reducing Overhang
«After all, with debt overhang and no debt restructuring, some of the return to future investments will go toward repaying the existing creditors, leading to underinvestment. It is in the country’s interests and also in the collective interest of the creditors to avoid this outcome,» Nieman said.
A comprehensive international financial architecture has been developed in recent decades to tackle these kinds of issues. They include International Monetary Fund (IMF) instituted reform programs, the Paris Club, which coordinates debt restructuring between official, bilateral creditors, and the London Club, which does the same for commercial bank creditors.
According to Nieman, China has chosen to pursue its own path when it comes to restructuring bilateral debt, with both policy requirements and commercial banks relying on limited cash flow treatment and not writing down large losses.
No Haircuts
He says that this has resulted in significant delays and, importantly, does not reduce the debt burden of borrowing countries. More often than not, deals have lengthened maturities and grace periods while there have only been four cases since 2000 that involved any haircuts on official China debt.
This is important in that China became the world’s largest official creditor in 2017 and its claims now surpass that of the World Bank, the IMF, and all Paris Club creditors. According to him, a recent study indicates that as many as 44 countries owe debt that is more than 10 percent of their GDP to China.
Lending by China is ostensibly not as transparent as it should be, which is leading to coordination problems, particularly involving cases where multilateral restructurings are underway, with loans often containing non-disclosure agreements. That keeps them out of international surveillance and restructuring efforts.
No Club Member
«One study found that all contracts with Chinese state-owned entities after 2014 contain strong confidentiality clauses that prevent the borrower from disclosing any terms unless required to do so by law,» Nieman said.
As part of that, the loans feature clauses that allow Chinese lenders to cancel the debt and require immediate repayment for a large number of circumstances, with collateral being included in up to half of the signed contracts and repayment arrangements usually involving escrow accounts. This means, in practice, that borrowers cannot take advantage of standard multilateral restructuring practices.
«In fact, around three-fourths of all Chinese debt contracts contain clauses that expressly commit the borrower to exclude Chinese debt from Paris Club restructurings or from any comparable debt treatment. Countries that seek a Paris Club debt restructuring find themselves either having to violate the terms of their borrowing from China or to violate the principle of comparability of treatment,» Nieman stated.
Belt and Road
Recent experience shows that much Belt and Road project financing has probably been made on such a basis. As finews.asia reported previously, the pace of lending has clearly slowed since the pandemic.
The key question now is whether China will continue with the same strategy, one sharply focused on getting lent money back or start to adopt the tested practices of the international community that are aimed at providing relief first.
