According to a recent report by the International Monetary Fund (IMF) and the Institute of International Finance (IIF) from 2016 to September 2020, global debt has increased by $52trilion while in the period 2012-2016 it has increased by $6trillion; global debt is expected to exceed $277trillion in total by the end of 2020.
The biggest problem is faced by emerging economies whose debt has increased dramatically due to the current over-indebtedness of these states and their domestic businesses by uncontrolled borrowing from China. Debt for all emerging economies has increased overall by 26%. In other words, it is close to 250% of the total GDP of these economies.
by Trust Economics-https://trusteconomics.eu
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Due to the pandemic and the lockdowns imposed to deal with the Covid-19 pandemic, their tax revenues levels have fallen dramatically, and they are not able to meet their loan obligations.
G20 group of countries recently agreed on the implementation of a common framework for the restructuring of the public debt of these economies-countries. In this context, binding/mandatory guidelines and rules are presented for all creditor countries whether or not they belong to the G20 (this includes China) where on the basis of these common guidelines it will be decided whether to delete or restructure a State’s debt.
The G20 group of countries adopts the regulatory framework of the Paris Club which is the only body in the world responsible for fiscal restructuring/debt write-off worldwide.
In November they ended up officially declaring bankruptcy/inability to repay government loans from seven poor countries. On 13 November 2020, Zambia became the sixth country to declare an inability to repay its government bonds.
Any lengthening of the maturity period of government bonds of bankrupt countries and/or suspension of payments for a certain period are welcomed by the governments of those countries but these are merely facilities do not solve the problem.
A country to escape bankruptcy, will have to redesign its fiscal programme after its bankruptcy has been lifted and re-borrowed.
Such fiscal programmes should include:
1. Increase taxation on environmental protection policies with aim to reduce carbon dioxide gas emissions.
2. Reduction of tax evasion and avoidance equally if this size in the economy does not exceed 7% of annual GDP per year.
3. Redesign the tax scale with more representative tax rates which should also be imposed on indirect taxation.
4. Reducing government spending and privatizing state-owned companies and outsourcing businesses by implementing an extensive outsourcing programme in the public sector and mass redundancies of hundreds of thousands of civil servants.
As regards the lending received by these countries and since they prefer government bond issues because bank loans are more expensive than bond issues they should:
1. All governmental bonds issued must have contained “collective action clauses” which will force all bondholders to go along with any deal accepted by the majority.
2. There should be government bond issues attached to certain government agencies and companies respectively of the borrowing state so that these issues become increasingly attractive, but these issues should also have negative-pledge clauses preventing the borrowing state from transferring these collateral assets to other creditors.
3. The bank syndicated loans should contain terms that allow a lender to be omitted from the syndicate if and only if it tries to block a government debt restructuring agreement.
4. In addition, issues of bullet bonds should be considered, where the debt will not be repaid for a specific period of time if there is a natural disaster and the lender at the end of the repayment of the proposed bond will receive a higher repayment price (bond principal + higher interest rate) (without the need to extend the bond or impose a subsequent interest on an initially issued government fixed income bond).
