How the IMF is handling a growing debt crisis in emerging economies : The Indicator from Planet Money Low-income countries are falling behind on their debt payments. Countries like Zambia, Chad and Sri Lanka have already defaulted, and others could be on the brink. Today, we examine the escalating debt crisis in the global economy and how the International Monetary Fund says it's going to help.

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Why a debt tsunami is coming for the global economy

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And I'm Darian Woods. As interest rates have risen, there are urgent debt crises looming in the global economy. About 60% of low-income countries are having trouble keeping up with debt payments. That number is growing at an alarming rate. It has doubled in just the last few years.

WONG: This long list includes countries like Tonga, Ethiopia and Sudan. Many of them have a staggering number of people living in poverty and are dealing with a lot of economic pain that these loans are supposed to help them with.

WOODS: It's a huge concern for an organization that's supposed to help stabilize the global financial system and help countries prosper. That's the International Monetary Fund, or the IMF. And lately, the IMF has been sounding an alarm bell about what it sees as a dangerous debt wave threatening to overwhelm a lot of countries.


WONG: Today on the show, we talk to a leader at the IMF about how so many countries found themselves in trouble and what the fund is doing to try to keep the global debt crisis from escalating further.


WONG: Ceyla Pazarbasioglu is an economist who's been a senior official at the IMF for two decades.

CEYLA PAZARBASIOGLU: I basically cover issues related to IMF policy, strategic vision, as well as review of our work.

WONG: That sounds like everything.

PAZARBASIOGLU: (Laughter) Pretty much.

WOODS: Ceyla says the global economy has seen four major debt waves since the 1970s. These are periods where countries accumulate a lot of debt really fast. And each of the first three debt waves ended when there were these big economic shocks culminating in widespread economic meltdown. There was the Latin American debt crisis of the 1980s. There was the Asian financial crisis of the late '90s and the global financial crisis starting in 2007.

WONG: Now, you might be wondering - what about the fourth debt wave? Well, Ceyla says that's the one we're in now.

PAZARBASIOGLU: So we have a fourth wave since 2010, and this has reached almost tsunami levels during the pandemic.

WOODS: Tsunami levels of debt. Ceyla says that governments, both high- and low-income, needed lots of money in the last couple of years to deal with all the unexpected events that rocked their economies. So the governments borrowed that money. They borrowed from the IMF and from other countries, and they also sold government bonds in financial markets. These countries felt like they had to.

PAZARBASIOGLU: We had the pandemic. We had the war. We have now the inflationary pressures. We have the climate-related disasters in many countries. So the countries are all...

WONG: For a lot of low-income countries, as their expenses went way up, their revenue went down. Think of countries like the Maldives or Grenada. Pandemic shutdowns wiped out tourism, and that meant a lot less revenue coming in.

PAZARBASIOGLU: When you have all these shocks hitting countries, undoubtedly the growth slows down, and they go into difficult periods. And that's why it's very...

WOODS: Another big problem has been the strong U.S. dollar. These lower-income countries typically borrow in dollars. And when the U.S. currency is strong, it means that these governments need even more dollars to keep up with their debt payments.

WONG: These dynamics added up to unsustainable amounts of debt for lower-income countries. Some of them defaulted. They couldn't pay up.


UNIDENTIFIED REPORTER #1: And now, for the first time in its history, Lebanon has defaulted.

UNIDENTIFIED REPORTER #2: And now, for the first time in its history, Sri Lanka has defaulted on its national debt.

UNIDENTIFIED REPORTER #3: That's made it Africa's first pandemic-era sovereign default. And things haven't improved...

WOODS: And unlike when an individual person or a company can't pay their debts, it's not like there's a straightforward bankruptcy process and a court that governments can just go to. Countries that run into debt problems have to sit down with their lenders and hash out new payment terms. This is called a debt restructuring. And it's where the IMF comes in, as this kind of monitor of the rules of the game when it comes to borrowing and lending on the global stage.

PAZARBASIOGLU: It's in everyone's interest to find, as soon as possible, a solution so that the country can actually get out of their debt trap, start growing and be able to service the new debt.

WONG: But in this current debt wave, there's been a wrinkle in how these new payment terms get negotiated. Remember when we mentioned that governments borrow money from other governments? Well, it used to be that the major lenders were countries like the U.S. or Germany or Japan.

WOODS: And those countries, over many decades, developed this kind of informal playbook on how to deal with debt restructuring. They would work together on negotiations so that everyone got basically the same terms. So Germany wouldn't be able to get a better deal on repayments than the U.S., for example.

WONG: But here's the new wrinkle. Ceyla says that, today, there's a lot of new players on the scene that are loaning money to governments - countries like China and even private companies.

PAZARBASIOGLU: Now, we see that the ratio of creditors such as China, India, Saudi Arabia and some other countries have increased. Why is that important? Because we have mechanisms in the past to deal with debt distress when that happens. With the new creditors, that type of creditor coordination is not as established as before. And we have the G-20...

WOODS: So in other words, some of the countries might want to negotiate in their own way to get really good repayment terms for themselves. They might not want to work with the other lenders, and that could make debt restructuring even more difficult.

WONG: Given all of this, it's no wonder the IMF has been sounding the alarm on government debt as the global economy enters 2023.

PAZARBASIOGLU: In this very difficult period, where we have a cost-of-living crisis in the world, this is really hitting the most vulnerable the most. And those countries need support.

WOODS: So here are two ways the IMF is trying to provide that support and avert a cascade of defaults and messy negotiations. No. 1, temporary breathing room and a debt pause. Early in the pandemic, the IMF talks to the G-20 group of nations - that's major economies like the U.S., like China and the U.K. - and the IMF persuaded them to let low-income countries temporarily pause their debt payments.

PAZARBASIOGLU: It was urgently put together and provided relief to many countries - these are the poorest countries in the world - as they were dealing with the pandemic.

WONG: And it's not forgiveness. It is relief and suspension, which means they just get more time to pay off their debts or they get better terms?

PAZARBASIOGLU: Correct. Correct. And that's a very important distinction, right? So they get temporary relief, and there is a grace period and so on. But if countries are able to grow and get out of the pandemic-related and other problems that they face, then they will be able to get back on track and be able to service their debt.

WOODS: The pause was about 18 months. But for some countries, that temporary relief wasn't enough for them to get back on track. Take Chad. In early 2021, Chad said it was still in trouble and couldn't pay back its creditors. Its lenders, by the way, included a bunch of those new players that Ceyla mentioned, like China, India, Saudi Arabia - even a Swiss oil trading company called Glencore.

WONG: Chad's dilemma brings us to the second thing the IMF is doing to tackle this debt crisis. It's pushing a new playbook for debt restructurings that includes these new types of lenders.

WOODS: This playbook is called the common framework. And under the system, the lenders agree to negotiate at the same table and get the same terms. So a country like Chad wouldn't need to have one set of talks with the Saudis, another with China, one with India and also the oil trading company Glencore. And Ceyla says getting private companies like Glencore to the table is what makes this new playbook especially unique.

WONG: So is it an opt-in kind of thing, where you had to go to this private company and say, we've set up this common framework, it would be great if you could participate, and then they can decide? Or is there a way to force them to the table if they don't want to?

PAZARBASIOGLU: So the common framework is built on the private sector participating in comparable terms, which means, if they don't, then the whole thing falls apart, right? But it's in the interest of everyone because no one benefits if the country, unfortunately, goes into crisis. They won't be able to pay anything.

WONG: Late last year, Chad became the first country to reach a debt restructuring agreement under this new system. But the IMF has acknowledged that progress has been slow. Zambia and Ethiopia started their talks with creditors over a year ago, and there's no resolution in sight.

WOODS: Just last month, Ghana said it was interested. These negotiations will be an important test of whether this new playbook can keep this fourth debt wave from spiraling into a full-blown crisis.


WONG: This episode was produced by Corey Bridges, with engineering from Katherine Silva. Sierra Juarez checked the facts. Viet Le is our senior producer. Kate Concannon edits the show, and THE INDICATOR is a production of NPR.


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