Home>>

Report warns world’s developing countries of “Trap of International Financial Capital”

By Zhang Jinruo (People's Daily) 18:08, August 05, 2022

Beijing (People’s Daily) – On August 3, 2022, the launch event for the report titled “The Trap of Financial Capital: The Impact of International Bonds on the Debt Sustainability of Developing Countries,” co-organized by Tsinghua University’s Department of International Relations and the China Forum under the Center for International Security and Strategy, was held in Beijing.

The report takes stock of the lessons learned from the issuance of Eurobonds by developing countries and calls on the international community to work together to avoid any further expansion of sovereign bond defaults by taking timely precautions and fostering an international financial system that accounts for the characteristics of emerging markets.

The report points out that developing countries have been facing rising debt pressures since 2020—which presents a significant threat to the ongoing global economic recovery.

According to the report, the surge in bond issuances and bond crises in African countries stems from international financial capital's provision of loose and convenient measures towards developing countries during periods of economic downturn, which has in turn encouraged these countries to issue Eurobonds so that the international financial capital – mainly well-known investment institutions in Europe and the United States – can reap high yields from the rapid growth of emerging markets. However, as developing countries have vulnerable economic structures and lack financial risk management experience, they have faced difficulties dealing with the superimposed impacts of multiple adverse factors engendered by the global economic downturn. Many countries have been forced to issue new bonds with higher interest rates in order to repay old debt, forming a vicious circle in the medium- and long-term.

The impact of international bonds on sovereign debt has been widely neglected by Western media and research institutions, the report warns. Through a systematic analysis of the negative implications of Eurobonds, the report finds that certain market behaviors based on developed countries’ financial systems just do not work for small, inexperienced developing economies. The bond issuance and liquidity rules formulated by financial institutions in developed countries tend to give priority to the interests of financial institutions and the needs of the developed country markets. They fail to fully account for the characteristics of developing countries, such as single revenue sources, strong cyclicality, weak risk management, and the need for infrastructure construction over the long-term. The issuance of Eurobonds, a procyclical commercial behavior, has meanwhile exacerbated the economic fluctuations of developing countries. For emerging economies, the sudden reduction in public expenditure caused by the peaking of debt repayments and the consequent difficulties in refinancing might bring an abrupt end to their economic restructuring efforts that have taken place over the past decade or more. It will take a long time for them to recover to their pre-crisis levels after the liquidity crisis comes to an end. Such a huge impact arising from cyclical repayments has already caused several developing countries to fall into a vicious cycle of unsustainable economic growth in their most recent period of historical development.

Tang Xiaoyang, the report’s lead author and a professor in the Department of International Relations at Tsinghua University, presented the report at the event. He pointed out that since Africa faces over $100 billion worth of bonds that are set to mature between 2023 and 2025, a debt and liquidity crisis is looming over the continent, which therefore calls on developing countries to better manage the relationship between the market and demand.

Photo shows Tang Xiaoyang, the report’s lead author and chair of the Department of International Relations at Tsinghua University. (Photo/Yuan Xiaojun)

In his remarks, Mr. Siddharth Chatterjee, the UN resident coordinator in China, analyzed the challenges posed by the COVID-19 pandemic to global socio-economic development, which, when coupled with the debt and liquidity crises, have hindered progress towards the Sustainable Development Goals. The UN can play a larger role moving forward in fostering innovative synergies, he further noted.

Photo shows Siddharth Chatterjee, the UN resident coordinator in China. (Photo/Yuan Xiaojun)

Ambassador Rahamtalla Mohamed Osman Elnor, the African Union representative to China, stressed that the multitude of problems faced by developing countries in terms of debt servicing and bond issuance needs greater attention from the academic and policy communities. He also dismissed the so-called “Chinese debt trap in Africa” as a factually ungrounded argument.

Photo shows Rahamtalla Mohamed Osman Elnor, the African Union representative to China. (Photo/Yuan Xiaojun)

Mr. Ying Haifeng, the president of Dagong Global Credit Rating Agency, touched upon the pressing need to build a sound ratings system for developing countries. Chinese wisdom could be used to provide a fresh analytical perspective and solutions for providing ratings on behalf of developing countries, he said.

Photo shows guests and attendees at the launch event for the report titled “The Trap of Financial Capital: The Impact of International Bonds on the Debt Sustainability of Developing Countries,” co-organized by Tsinghua University’s Department of International Relations and the China Forum under the Center for International Security and Strategy, as held in Beijing on August 3, 2022. (Photo/Yuan Xiaojun)

The event brought together over 40 media outlets from China and from African, Latin American and other Asian countries, as well as diplomatic envoys in China. 

(Web editor: Hongyu, Bianji)

Photos

Related Stories