Defaults Loom as Poor Countries Face an Economic Storm
Since then, the finances of developing countries have continued to deteriorate. The Council on Foreign Relations said this past week that 12 countries now had its highest default rating, up from three 18 months ago.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Brad Setser, a senior fellow at council, estimates that $200 billion of sovereign debt in emerging markets needs to be restructured.
“It is certainly a systemic problem for the countries that are affected,” Mr. Setser said. “Because an unusually large number of countries borrowed from the market and borrowed from China between 2012 and 2020, there’s an unusually large number of countries that are in default or at risk of default.”
Restructuring debt can include providing grace periods for repayment, lowering interest rates and forgiving some of the principal amount that is owed. The United States has traditionally led broad debt-relief initiatives such as the “Brady Bond” plan for Latin America in the 1990s. However, the emergence of commercial creditors that lend at high rates and prolific loans from China — which has been loath to take losses — has complicated international debt relief efforts.
Fitch, the credit rating firm, warned in a report last month that “more defaults are probable” in emerging markets next year and lamented that the so-called Common Framework that the Group of 20 established in 2020 to facilitate debt restructuring “is not proving effective in resolving crises quickly.”
Since the framework was established, only Zambia, Chad and Ethiopia have sought debt relief. It has been a grinding process, involving creditor committees, the International Monetary Fund and the World Bank, all of which must negotiate and agree upon how to restructure loans that the countries owe. After two years, Zambia is finally on the verge of restructuring its debts to China’s state banks, and Chad reached an agreement last month with private creditors, including Glencore, to restructure its debt.
Article source: https://www.nytimes.com/2022/12/03/business/developing-countries-debt-defaults.html