The head of the wealthy creditor nations group of the Paris Club stated that China’s growing leading role as a lender to poor countries has prevented many poor countries from seeking debt relief because they fear that they will not be able to obtain future Chinese funds.
The president of the Paris Club and the head of the French Ministry of Finance, Emmanuel Moulin, told the Financial Times that countries “do not want to create difficulties with China”.
Since the beginning of the pandemic, the debt of low-income countries has risen sharply because health care and other costs have pushed up public spending, while a severe global economic recession has hit output and government revenue.
This triggered international efforts to reduce its debt burden. The Debt Service Suspension Initiative (DSSI) launched by the G20 large economic group in April last year allowed the world’s poorest countries (mainly in sub-Saharan Africa) to postpone the default of interest owed to official bilateral creditors.
It was originally scheduled to expire at the end of last year, but it has been postponed twice and will now end on December 31.
Nevertheless, few countries choose to take advantage of the plan. Of the 73 eligible countries, only 42 applied for support. The $12.7 billion extension is much lower than the original estimate, indicating that DSSI will provide about $20 billion in relief in 2020 alone.
Moulin said this relatively low acceptance rate is partly due to China’s rapidly growing role in providing loans to other countries. In recent years, China has become the largest bilateral lender to countries eligible for DSSI and currently accounts for nearly two-thirds of its bilateral debt.
“Some countries decided not to apply for the finals [DSSI] Postponed because they don’t want to create difficulties with China,” Mullin said. “Some countries are more willing to discuss new funds with China and other creditors than to ask for help under DSSI. “
However, China has contributed the most to DSSI so far.The calculation of the NGO Jubilee Debt Campaign estimates that it has $5.7 billion deferred payment, While the members of the Paris Club postponed US$4.5 billion.
The Paris Club was established by creditor countries in 1956 to solve the debt problems of nation-states around the world. At that time, its members dominated the global bilateral loan market. Today 22 high-income and middle-income countries are members.
China has not yet joined the organization and has disagreements with the club on the classification of some loans, although China agreed to follow the Paris Club’s approach to DSSI.
Mullin said that overall, “we can’t complain about China’s participation in DSSI. Their implementation is very fair.”
The G20 plan also calls on debtor countries to require their commercial creditors, such as bondholders and banks, to enjoy similar treatment to those provided by bilateral lenders. None of the participating countries did so because they feared that they would not be able to obtain future borrowings or cause their credit ratings to be downgraded, which could lead to defaults.
Participating countries must make up the deferred amount in full within the next four to six years.
Since the first few months of the pandemic, several factors have eased the financial conditions of developing countries and reduced their pressure to resolve their debt burdens. These include the huge liquidity injected into the global market by the world’s major central banks, the rise in commodity prices, and the liquidity injected by the International Monetary Fund this summer.
Therefore, Mullin said that in recent months “the situation is different from when it started.”
The G20 has developed a general framework to deal with debt handling outside of DSSI, which will take effect next year. Its scope is much narrower, and it is only open to countries with unsustainable debt and risk of default. So far, only Ethiopia, Chad and Zambia have requested to participate.
Moulin stated that the progress of the common framework has been slower than expected. “Some people criticize the slowness of this process. This is true, and we also know this fact. We would have liked it to be faster,” he said.