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  • In 2020, sovereign debt defaults hit a record high after Zambia became

  • the sixth country to fail to repay its outstanding loans, to the tune of $43 million dollars in November.

  • This came after Argentina, Belize, Ecuador, Lebanon, and Suriname also defaulted on their debts that same year.

  • In fact, global debt has been on the rise since 2016.

  • The coronavirus pandemic has accelerated borrowing, with governments worldwide spending billions of dollars

  • to mitigate the economic impact of the crisis, often borrowing huge sums in the process to save jobs and livelihoods.

  • The shortfall is usually funded by issuing government debt in the form of bonds.

  • So, what happens when governments fail to pay back the investors who bought these bonds?

  • In 2003, Iraq owed roughly $130 billion to its foreign lenders, making it the most indebted country in the world then.

  • It didn't help that the United States invaded the country in the same year.

  • Iraq would later turn to the Paris Club for help, and in a twist of fate

  • the U.S. pushed to write off around 90% of the war-torn nation's debts.

  • However, its other creditors, including Germany and France, were only prepared

  • to forgive less than 50% of the outstanding amount.

  • Ultimately, the Paris club wrote off 80%of Iraq's debt, providing fresh ground for the country to rebuild.

  • But debts weren't always settled in such civilized ways.

  • Towards the end of 1902, Great Britain, Germany and Italy imposed a naval blockade

  • against Venezuela for failing to honor its debt repayments to them.

  • While the small Venezuelan fleet was quickly disabled, a compromise

  • was reached after the U.S. intervened with its much larger fleet of warships.

  • Worried about thegunboat diplomacyby the European nations in its backyard,

  • the U.S. later crafted a policy aimed at justifying interventions it claimed would

  • stabilize the economic affairs of small states in the Caribbean and Central America.

  • Thankfully, such strongarm tactics are a thing of the past in the 21st century.

  • However, global debt levels are on the rise.

  • In 2020, the global 'debt tsunami' is to reach a staggering $277 trillion, or 365% of global GDP.

  • Among emerging markets, debt levels rose to nearly 250%of GDP, as governments

  • in these developing countries diverted revenues to make repayments.

  • Emerging economies often have the potential for rapid economic growth,

  • but they are also more vulnerable to economic shocks.

  • To calm investors' fears, these governments tend to pay their loans

  • using the more stable U.S. dollar rather than their volatile currencies.

  • The risks mean investors often demand a higher price for lending money,

  • which can increase the likelihood of these payments becoming unmanageable.

  • Many turn to the International Monetary Fund for relief, such as temporary loans to restore economic stability.

  • For emerging economies facing trouble in fulfilling their debt repayments, this is where the Paris Club steps in.

  • The Paris Club provides help by either canceling debt outright or rescheduling payments over a longer period.

  • Unlike the London Club, which is an informal group of private lenders,

  • The Paris club is made up of 22 permanent creditor countries.

  • The members include most major economies, except for China.

  • The group got its name in 1956, when Argentina, on the verge of default, met with the countries

  • it owed money to in Paris to discuss solutions to its debt difficulties.

  • In the years since, the club has signed more than 400 agreements worth

  • more than half a trillion dollars with 99 countries with long-term debt.

  • The process, known as debt restructuring, involves negotiations between member states

  • and heavily indebted countries to lower interest rates or extend the due dates.

  • The Paris Club usually meets 10 times a year, bringing together

  • debtor and creditor countries to negotiate new debt plans.

  • These negotiations are conducted before observers, typically from international organizations

  • such as the United Nations, the International Monetary Fund and World Bank.

  • The meetings, traditionally chaired by a senior official of the French Treasury,

  • are responsible for ensuring the discussions align with the Paris Club's

  • set of six principles built around compromise, negotiation and consensus.

  • These principles include being sensitive to the impact their actions have on others in the club and confidentiality.

  • To be eligible for help, debtor countries need to have a track record of implementing, or

  • at least showing commitment to implementing economic reforms aimed at decreasing their total debt.

  • A debtor country, when seeking relief from other non-Paris Club members,

  • should also do so on comparable terms arranged with the group.

  • Members of the Paris Club then tailor their decisions to the needs of each country

  • they deal with, rather than adopting a one-size-fits-all approach.

  • It was in this spirit that the Paris Club members agreed to reduce debts

  • for the poorest countries by a third for the first time in 1988.

  • Six years later, the group agreed to reduce some debts by 67%.

  • As the debt situation in some countries continued to spiral out of control,

  • the Paris Club worked on a program with the IMF and the World Bank to provide further debt relief in 1996.

  • In April 2020, the Paris Club agreed to write-off $1.4 billion owed by war-torn Somalia, making

  • the impoverished nation the 37th country to qualify for debt relief under the HIPC initiative.

  • The Paris Club faces a challenge to its credibility and power because of China's absence.

  • The Asian giant has become a major creditor in the decades since the Paris Club was established,

  • but prefers to deal with its debtors on its terms.

  • China's conditions for lending to developing countries are often opaque,

  • contrasting with the club's principles of transparency.

  • Beijing has, therefore, shied away from the club, reluctant to reveal the details of its debt agreements with other countries.

  • Yet, the continued relevance of the Paris Club, could hinge on China's co-operation.

  • In 2018, 72 low-income countries had debts amounting to $514 billion.

  • Of this, $104 billion was owed to the Chinese government $106 billion

  • to the World Bank and $60 billion to private bondholders.

  • With China's loans accounting for roughly 20% of the total external debt by these developing economies,

  • it will play a crucial role in any future negotiations on debt restructuring.

  • The question of whether China will work alongside the existing members of the Paris Club has never

  • more critical than during the coronavirus pandemic, which has left many indebted countries facing default.

  • The size of the looming debt crisis has driven the club to work on a broader scale than its usual case-by-case approach.

  • The club, along with the World Bank and the IMF, is working to reduce

  • the financial burden on 73 low- and middle-income countries.

  • This initiative, known as the Debt Service Suspension Initiative has seen around

  • $12 billion worth of repayments due between May and December 2020 rescheduled to mid-2021.

  • For low-income countries seeking debt relief, China's absence from the Paris Club complicates

  • debt repayments while undermining the coordinated action needed to recover from the Covid-19 recession.

  • Whether the Paris Club can find its voice amidst the global debt tsunami

  • and the rise of China's economic might will impact the lives of millions in the years to come.

  • Thank you so much for watching our video!

  • if you're on lockdown we first want to know how you're coping

  • and secondly your thoughts on the Paris Club, and how it functions

  • Don't forget to subscribe!

In 2020, sovereign debt defaults hit a record high after Zambia became

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    Summer posted on 2021/03/10
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