The new “third world debt crisis”?

Developing countries racked up a “towering” $55tn of debt by the end of last year, in a borrowing surge since the financial crisis that has been the fastest and widest in modern history, according to World Bank research.

China itself, whose debt-to-GDP ratio has risen 72 points to 255 per cent since 2010, accounts for the bulk of the boom, but nominal debt levels have doubled in the rest of the developing world, the bank found.

For now, historically low interest rates make a crisis less likely, according to the report, but the authors said that roughly half of the 521 national episodes of rapid debt growth since 1970 have resulted in crises which significantly hurt incomes.

Here is more from Tommy Stubbington at the FT.

Comments

I believe that should be "Stubbington" on the byline

It already started

Is the debt owed in their own currency? Was it invested in infrastructure? If truvto both then debt does not matter. If owed in USD or used simply to fund offshore accounts of Government officials then it matters. MMT experiment!

The famous emergent debt urban legend that people in third world countries are victims of kleptocratic governments. Of course not. When there is a ramp-up in debt in those countries, everyone is corrupted and gets their (unequal) share. Also nobody lends to those countries in their local currency.

Growing economies should take more debt to invest in infrastructure healthcare and education as the return on that investment will exceed current interest rates. Debt to GDP ratios are meaningless as they can like Singapore increase per capita GDP many times. Debt is less important than corruption and business friendliness in the fate of developing nations.

I am not sure that the return on investment on healthcare and education is positive for local governments. Educated and healthy people tend to be more critical of their governments. And governements will be less able to use them as baits for foreign aid.

What is the rate of return that country gets on its invested debt or "equity" ? Has anyone asked that question before ? Maybe we should permit a hostile takeover of a country if the hostile team has a track record of higher return on capital.

A hostile takeover of a country is called war. States have a notoriously bad track record with colonization. And they supposedly all agreed to end that in 1945 at the UN.

Bu return on capital I meant not just money but increases in human welfare. Quality adjusted life years in currency equivalent- pick your favorite utilitarian formula.

Here's a chart of government debt at the end of 2018 (the chart shows each nation's debt as a percentage of total world debt and it's color coded to show debt as a percentage of GDP): https://www.weforum.org/agenda/2018/05/63-trillion-of-world-debt-in-one-visualization The joke is that the U.S. is becoming Greece, but the reality is that Japan is Greece. Of course, not all debt is created equal: debt incurred to increase a nation's productive capacity is different from debt incurred to pay operating expenses (consumption). Third world debt is concerning because it's mostly the latter. I learned this morning that there's a Committee for the Abolition of Illegitimate Debt, which has a web site: https://www.cadtm.org/Third-World-Debt,701

The chart was for government debt as of 2017 (not 2018) first made public by the IMF in May 2018. Here's the link to an update with much greater detail, including private as well as public debt: https://www.imf.org/external/datamapper/datasets/GDD

I went searching for the data because I am not a subscriber to FT.

Debt:GDP not so important when you can do catch-up growth that allows you to grow out of that debt, and your structural demographic propensity to compound debt further not as high, like you're coming out of a baby boom into a baby bust and you're not going to be an old society for a long time.

Not really a fan of the shilling for the excesses of state-run massively state-led investment export oriented development (a la "East Asian model") and I frankly think it's a bit of a scam (which benefits big business business and cronies) and most countries would get to the same levels of living standards through economic liberalization towards free internal markets and investment in health, education, etc.

But the reasons for very low GDP countries to avoid high Debt:GDP are not the same as for countries at the frontiers with little obvious opportunity for productivity growth.

Thank you, Trump.

zzt = Prior?

Love the latest game here - identify the comments to delete.

And to think anyone can play - the cleverer players could get entire blocks of comments deleted.

The comments on this post are weird even by MR standards. Someone had extra caffeine this morning.

For the ones without an FT account https://www.theguardian.com/business/2019/dec/19/debt-in-developing-economies-rises-to-record-55tn

Well, "debt" means consumer, business and sovereign (government) types.

Thins are fine now in a world with low interest rates, but the issue here is vulnerability to financial shocks, wherever they may come. The article mentions one of the risks: commodity prices.

'commodity prices'

Or perhaps of more relevance, commodity quantities, particularly agricultural ones. Less coffee means higher prices, but total revenue may still go down dramatically with various longer term impacts to the weather.

Well, financial shocks are by definition impossible to predict. All people can do is avoid being caught in a bad situation (high debt levels) when the next one comes.

A major shortfall of a grain harvest, such as in Australia or the U.S.
is likely to be more than a fínancial shock. Markets do not bring rain, and though markets can price commodities, that is not quite the same as providing a sufficient quantity within a particular timeframe.

Don't worry about it. The Ukraine and Australia alternate grain production shortfalls. The chance of both regions having disastrous harvests the same year must be less than that of Australia breaking all previous heatwave records.

The total includes all forms of debt – consumer, business and government – and illustrates the pressure on all parts of the economy to honour debt payments, mostly to banks and international investment funds.

So much of the world's wealth is in the hands of banks and other financial entities. Their goal is to increase these holdings by making loans, the repayment of which are eventually the responsibility of the population rather than the policy-makers that originated them. These loans are composed of fiat pixels that represent accounting entries generated by central banks rather than actual wealth. However, the loans must be repaid by the representations of reality, commodities, industrial production and services. In the long run, that can't work.

Is China still in the "developing" group?

Wikipedia seems split, yes developing, but "high" on the Human Development Index.

https://en.m.wikipedia.org/wiki/Developed_country

On debt .. it seems a hard thing to call. International development and debt finance is forever in a new state. There are no repeated games (same rules and conditions) from which to draw statistics. People who must make a call on a loan have to make a guess, based on some supposed historical parallel, but I'm glad that's not me.

The safest answer for the rest of us is "who knows?"

(I hold no foreign debt or securities. True American here.)

Well played on the wink to the true Americans.

Well played good sir. I tipith my hat.

It was kind of a funny thing. Some years ago, fairly right wing investment gurus would say we "must" own developing market equities.

I liked John Bogle's answer that his S&P 500 index already provided "adequate exposure."

So the real inside joke is that I own foreign bonds and equities the old fashioned way, through the S&P 500.

Largest debt issuance was China, they went hog wild. But they got a debt rebellion in Hong Kong. Lebanon has financially collapsed, ditto Pakistan, now paying 13% for short term bills after three devaluations. France is stuck having to sort out debt costs between the generations, and Europe is bouncing slightly below zero in growth. Brexit is mostly debt rebellion, or a demand to return government liquidity. Rebellions across Latin America, mass migration. Failed states in Illinois and New Jersey, and likely California. Mexico a goner.

Not a problem, been there, done that.

"historically low interest rates make a crisis less likely,", the World Bank says.

Rates are low because debt has been extended in term. Eventually this causes the tipping point, namely we get twenty year old kids paying long term debt fees on some losses from forty years ago. They get clue.

The Baumol process in action.

Calculate the Congressional interest rate by taking total debt (include trust fund), into yearly debt payments. That has been historically at the ten year rate since 1980.
Extend the curve in slope out to fifty years. Last month, that interest calculation (about 2.26%) is was greater that the thirty year rate, today is is closer to the 15 year rate. This is the rescaling process that happens in the economy, happening to money but happens to real goods also.

There is a micro reason we pay the ten year rate, we pay for the eight year presidential cycle plus a monopsony. Our Congressional depreciation cycle tends to line up the life of one of these large program until another faction comes to power.

So this seems to be 'all debt'. If a Chinese province issues a bond for $1000, a Chinese private company borrows $1000, another Chinese company borrows $1000 because the bank it owes a lot of money too doesn't want to take the hit of letting it go bankrupt and a middle-income family in Egypt happen to have a credit card balance of $1000.....that is all treated as the same type of debt even though these are all very different players.

Why is the Chinese province making loans in USD's?
I'd bet easier to originate using Yuan, and the pay off could be zero if so approved by their Central Command/PBC.

Arvind Subramanian on India's great slowdown (which is currently happening).

https://indianexpress.com/article/opinion/columns/indian-economy-gdp-slowdown-modi-government-6175652/

For a semi-retired non-academic Sci-hub can collect all the stats they want for access to the knowledge of the world. Way too many paywalls.

Most journal articles aren't worth the $30 or so they want to read them. This is especially true when I am trying to trace down advocacy science BS where they misquote their references or spin the data. No financial gain for me, just satisfaction of knowing what is and isnot true.

should be under previous assorted links.

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