Debt Impact: What Could Happen?

Private creditors have massively lent to countries of the Global South in 2023-2024

During 2022, private creditors massively withdrew from the countries of the Global South after the increase in interest rate
Interest rate
When A lend money to B, B repays the amount loaned by A (the capital), but also an additional sum called interest, so that A has an interest in carrying out this financial transaction. The higher or lower interest rate is used to determine the amount of interest.
Let’s take a very simple example. If A borrows $100 million over 10 years at a fixed interest rate of 5 %, it will repay in the first year one tenth of the initially borrowed capital ($10 million) and 5 % of the capital owed, or $5 million, so in total $15 million. The second year, he repays another tenth of the initial capital, but the 5 % only relate to $90 million remaining due, or $4.5 million, so in total $14.5 million. And so on until the tenth year when he repays the last 10 million dollars, and 5 % of this remaining $10 million, or $0.5 million, so in total $10.5 million. Over 10 years, the total repayment will be $127.5 million. In general, the repayment of capital is not made in equal installments. In the first years, repayment mainly concerns interest, and the portion of capital repaid increases over the years. Thus, in the event of a cessation of repayments, the remaining capital due is higher…
The nominal interest rate is the rate at which the loan is taken out. The real interest rate is the nominal rate minus the inflation rate.
decided by the European Central Bank
BCE
European Central Bank
The European Central Bank is a European institution based in Frankfurt, created in 1998. The countries of the euro zone have transferred their competence in monetary matters to it and its official role is to ensure price stability (fight against inflation) in the said zone.
Its three decision-making bodies (the board of governors, the executive board and the general council) are all made up of central bank governors from member countries and/or specialists. recognized “. Its statutes want it “ independent » politically but it is directly influenced by the financial world.
and the US Federal Reserve. Increasingly attractive interest rates were offered to them in the North, and they feared payment defaults in the South, the debt crisis in the countries of the global South having already started in 2020 at the time of the Covid-19 pandemic. Their massive and rapid withdrawal was then compensated by multilateral institutions. Among them, the International Monetary Fund
FMI
International Monetary Fund
The IMF was created in 1944 at Bretton Woods (with the World Bank, its sister institution). Its goal was to stabilize the international financial system by regulating the movement of capital.

To date, 190 countries are members (the same as the World Bank).

Click for more details. imposed policies contrary to the interests of the populations in exchange for loans.

The years 2023, and especially 2024, then saw private creditors – as interest rates fell in the North – return to the States of the global South. As proof, between 2022 and 2024, loans from commercial banks
Commercial banks
Commercial Bank
Commercial bank or deposit bank: Credit establishment carrying out banking operations with individuals, businesses and public authorities consisting of collecting funds to redistribute them in the form of credit or to carry out investment operations on an ancillary basis. Public deposits benefit from a state guarantee. A deposit bank (or commercial bank) is distinguished from an investment bank which essentially carries out market operations. For several decades, following the Glass Steagall Act adopted during the Roosevelt administration and equivalent measures taken in Europe, commercial banks were prohibited from issuing securities, shares and any other financial instruments.
to the public sector in countries of the Global South have almost doubled. Same thing for debt securities issued by the States of the Global South on financial markets
Financial markets
Financial market
Long-term capital market. It includes a primary market, that of emissions, and a secondary market, that of resale. Alongside regulated markets, there are over-the-counter markets which are not required to meet minimum conditions.
which increased from $70 billion in 2022 to $150 billion in 2024 [1].

If the war between Iran and the United States lasts, it could have a lasting impact on oil and gas prices and increase the price of imports from states in the Global South

If the US and Israeli aggression were to continue, traffic in the Strait of Hormuz could be considerably impacted. The rise in the price of oil, which is currently speculative [2]could therefore last because 20% of the oil consumed worldwide passes through this strait. Same thing for gas prices.

However, the states of the global South, particularly those in sub-Saharan Africa, import proportionally more manufactured products than other states, and export proportionally more raw materials. In the event of a lasting increase in the price of oil, they will therefore be strongly impacted because oil is necessary for the production (and transport) of many products imported by these countries. However, the opposite is not necessarily true. For example, 19% of Ivory Coast exports are cocoa beans. [3]an unprocessed product for which the increase in the price of oil will only have an impact on the price of transport.

Likewise, many countries in the South import fertilizers which require gas (nitrogen) to be produced. [4]. If the price of gas increases sustainably, the price of fertilizers will rise, and therefore that of imports from countries in the South as well.

An increase in the price of imports without an equivalent increase in the price of exports would require governments to obtain more hard currencies – particularly the dollar which dominates international trade. One of the ways to do this is to resort more to debt, to increase the level of exports – often by accentuating extractivist policies that are destructive for living things and local populations – or to specialize ever more in tourism.

Reaction of central bank
Central bank
A country’s central bank manages monetary policy and has a monopoly on issuing the national currency. It is from it that commercial banks are forced to obtain their currency supplies, according to a supply price determined by the central bank’s key rates.
and capital flight ?

Yes theinflation
Inflation
Cumulative increase in all prices (for example, an increase in the price of oil, ultimately leading to an upward readjustment of wages, then an increase in other prices, etc.). Inflation involves a loss in the value of money since over time, more money is needed to purchase a given commodity. Neoliberal policies primarily seek to combat inflation for this reason.
were to settle in the North, it is likely that the dominant central banks (the FED, the ECB and the Bank of England) would decide to increase their rates to counter inflation. This has already been seen in 2022 or at the beginning of the 1980s. Often, when they make this kind of decision, it causes or contributes to a debt crisis in the South because the interests are now more attractive in the North, capital (private creditors) find interest in lending to stakeholders.·ices and states of the North, gradually leaving those of the South.

If this increase in interest rates by the large central banks of the North – which mechanically increases the repayments of indebted countries – combines with an economic shock which reduces their income, then many governments of the South will have to repay more in hard currencies with less income. Let’s take some historical examples.

In parallel with the sudden increase in interest rates decided by the US Federal Reserve in 1981, the countries of the South had to face a significant drop in the prices of raw materials, of which they were very important exporters. So they had to repay more (because interest rates were rising) with less (because their hard currency earnings from exporting raw materials were falling). As a result, many countries have entered into debt default and debt crisis.

In the years 2020 – 2022, same situation with:

After the crisis of 2020 – 2022, a new fatal shock ?

After the debt crisis that began in 2020 – 2022, several countries entered into default, or came close to default. They appealed to the International Monetary Fund and other multilateral creditors like the World Bank
World Bank
BM
The World Bank brings together two organizations, the IBRD (International Bank for Reconstruction and Development) and the IDA (International Development Association). The International Bank for Reconstruction and Development (IBRD) was created in July 1944 in Bretton Woods (United States), at the initiative of 45 countries gathered for the first Monetary and Financial Conference of the United Nations.

In 2022, 189 countries are members.

Click for more details. . The latter came to compensate for the departure of private creditors, not without imposing their conditionalities
Conditionalities
Set of neoliberal measures imposed by the IMF and the World Bank on countries which sign an agreement, in particular to obtain an arrangement for the repayment of their debt. These measures are intended to promote “ attractiveness » of the country for international investors but severely penalize the populations. By extension, this term designates any condition imposed for the granting of aid or a loan.
neoliberal. The IMF lent in exchange for the adoption of several deadly measures by governments: increase in VAT (including on basic necessities), reduction in public subsidies for basic necessities, privatizations, ever greater specialization towards tourism and the export of raw materials, etc.

The year 2020 was marked by massive loans from the IMF backed by these different conditionalities. For example, the International Monetary Fund lent $18 billion to sub-Saharan African countries in 2020 (compared to $2.5 billion in 2019). [5]. These loans continued, in smaller proportions, in the years that followed. They came save » countries in difficulty from a prolonged payment default, which would have been synonymous with non-repayment of private creditors. For example, Zambia, Ghana, and even Sri Lanka in South Asia defaulted on their payments and appealed to the IMF.

The IMF therefore allows private creditors to continue to be reimbursed by imposing policies that clearly go against the interests of the populations, which serve private creditors by elevating their repayment to the number one priority, to the detriment of the most basic human rights. The Greek example showed this at the beginning of the 2010s, during which the Troika imposed inhumane policies on the population which, between 2008 and 2014, increased infant mortality by 42.8%, suicides by 44%, depression by 272.7%, unemployment by 190.5% and… debt by 36.5%. [6].

Let us point out that China is totally complicit in the IMF’s policy, pushing different countries, or even helping them directly, as it did with Milei’s Argentina, to repay the International Monetary Fund. [7].

This table shows a very significant increase in receivables
Receivables
Claims: Amount of money that one person (the creditor) has the right to demand from another person (the debtor).
of the IMF towards the countries of the South between 2019 and 2024. However, a new shock which would hit the countries of the South at a time when they had regained access to financial markets, would be synonymous with yet another return of the International Monetary Fund, at a time when many countries of the South are already very indebted to this institution. We could therefore fear a Greek scenario with increasingly harsh austerity policies, increasingly difficult living conditions for populations, and an ever more worrying deepening of the extractivist export model that is destructive of life.

This analysis is not intended to predict the future but to show what could happen if US aggression on Iran continues. It is based on previous debt crises by trying to highlight common points, causes which recur during the different debt crises which have marked the last fifty years.