From Washington to Paris, London to Tokyo, policymakers in every large economy have been counting the costs of bond market turmoil in recent weeks. But the brunt of the pain is being borne by heavily indebted developing countries that have little hope of influencing the whims of global investors, but pay the price regardless.
Markets have responded to the war in the Middle East, and a spendthrift White House, by dumping government bonds – driving up borrowing costs just about everywhere.
Finance ministers and central bankers gathering in Bangkok this week for the annual meetings of the International Monetary Fund and the World Bank may be loth to point the finger at Donald Trump’s regime, but all are at least in part hostage to the US president’s war plans.
That has made what was already a perilous situation even worse – just as the world is battling an energy crisis, and as developing countries urgently need to invest in adapting to the climate emergency.
Even before the latest market gyrations, experts calculated that debt servicing costs absorbed 45% of government revenues in the global south, and 70% in low-income countries. That crowds out desperately needed spending on public services and investing for the future.
There have been growing demands for reform of the framework for international debt in recent years, including from African Union heads of state, and under the G20 chairs of Brazil and South Africa.
The G20 – the forum in which Gordon Brown coordinated a global fiscal stimulus package in the depths of the financial crisis in spring 2009 – is meant to be an important body for discussing international economic issues. With a much wider membership than the G7, it has coordinated previous efforts on debt, including establishing the IMF-administered Common Framework, to which struggling countries can apply, and suspending repayments for hard-hit borrowers during the Covid crisis.
However, this year’s chair has been Trump’s US, which has placed much more emphasis on other aspects of the G20’s remit, including promoting global economic growth – somewhat ironically, given the main obstacle to achieving it is the war on Iran.
Next year, the presidency falls to the UK, and Labour has made clear it will have different priorities. These will include seeking a global agreement on AI regulation, which seems a faint hope but is clearly worth pursuing.
The UK also intends to put unsustainable debt on the agenda. The foreign secretary, Ed Miliband, who will be in Bangkok, told Labour conference delegates last month: “Friends, I promise this. We will use our G20 presidency next year to meet our responsibilities and mobilise the world, building on the great achievements on debt and development of the last Labour government.”
He was referring to 2005, when Brown and Tony Blair rode the vociferous Make Poverty History movement to the Gleneagles G8 summit and beyond, securing significant debt relief for more than 30 countries.
As the development minister, Kirsty McNeill, herself a veteran of that campaign, said recently, the circumstances now are very different, for two reasons. First, she said, “we’re now dealing with private creditors – the debt isn’t held by us. So that is quite a big shift.” And second, she suggested it was harder now to delineate a group of countries clearly deserving of support.
“There isn’t this really clear demarcation between the very poor world and the very rich world that was true when I was starting out, and it was just a much starker and therefore more readily told story because the antagonists and the protagonists were just much clearer,” she told an event at the Labour conference.
Yet she and other ministers have made clear they are open to proposals – and ready to throw the UK’s diplomatic weight behind making progress on this formidable challenge.
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One ambitious plan drawn up by the thinktank Development Finance International (DFI) and shared with the government would involve 27 of the most heavily burdened countries being given a 10-year “holiday” during which their debt service costs would be slashed to below 10% of their revenues.
Implemented by cutting interest rates and extending loan terms rather than writing off debt altogether, the $13bn-a-year cost would fall primarily on private creditors – which might have to be coaxed, cajoled, perhaps even legislated into taking part, as in previous debt relief initiatives.
The “hope initiative” also envisages potential relief for another six small island developing states that do not meet the threshold on the basis of their debt burden but are regularly battered by natural disasters. These could be offered a five-year “holiday” from the moment of the next extreme weather event they face, at the cost of a further $700m a year.
An even more expansive version would embrace another five countries, including Pakistan and Angola.
Crucially, because the international financial institutions – including the IMF and the World Bank – tend to be preferred creditors, only chipping in when other help is exhausted, the costs to them would be relatively low.
Echoing Andy Burnham’s slogan – so far confined to the domestic sphere – Matthew Martin, DFI’s executive director and the author of the plan, says: “Let’s bring hope back to the poorest countries in the world, through an ambitious but financially and politically feasible initiative, which will free up $13bn for them to spend on their climate and development goals.”
It remains to be seen how bold the government is prepared to be in setting its G20 agenda, but the groundwork is being done.
Labour trashed its reputation as a champion for international development when Keir Starmer took the axe to aid spending to pay for defence. Perhaps 2027 could be the year Burnham starts to rebuild it.
