Zhou Yuyuan

The sovereign debt issue of developing countries stands out in global governance and international development cooperation. Due to the COVID-19 pandemic， Ukraine crisis and interest rate hikes in developed economies， among other factors， the most broad-based increase in debt experienced by developing countries since 2008， is turning into the fourth round of debt crisis. About 15% of low-income countries are already in debt crisis， 45% are at high risk of debt distress， and 25% of emerging markets face risks akin to debt default. Four countries have applied to restructure their debt with the G20 Common Framework for Debt Treatments beyond the DSSI （Debt Service Suspension Initiative for Poorest Countries， DSSI）， or Common Framework in short， and seven countries are on the brink of default. More countries are seeking financial assistance from the International Monetary Fund （IMF） or looking for alternative sources of financing. Some Western powers have adopted irresponsible financial policies， and become notably more reluctant to assume their international obligations and provide global public goods. The politicization of debt issue has aggravated divisions， and the deficit in global governance.

Political factors Behind the Sovereign Debt Issue of Developing Countries

The sovereign debt issue and its management have everything to do with the international political landscape. Since the birth of the Bretton Woods system， finance has always been used by Western powers to seek hegemony and exert influence on developing countries. The rise of emerging markets， China in particular， is driving profound changes in the global financial system. One of the implications is the increasingly diversified sources of foreign debt for developing countries， which has made it more difficult to coordinate debt relief and management. Rapid response becomes harder when a sovereign debt crisis occurs， so does the prevention of new crises.

First， fragmented debt relief efforts as a result of diversified sources of debt. Despite being the largest creditors of developing countries， private creditors hardly participate in collective debt relief. Multilateral financial institutions， while dominating collective debt management， often opt out of debt relief in consideration of their credit ratings. Official bilateral creditors are cautious about whether and how to take part in debt relief， due to political， economic and financial factors at home. Differences also exist between their governments and financial institutions.

Second， the coordination of debt relief efforts. Compared with the top-down approach often adopted in multilateral or collective debt relief， bilateral bailouts are often bottom-up. In other words， creditors and debtors need to reach bilateral consensus first before a bailout is possible. When the sovereign debt relief is led by multilateral financial institutions， they often seek to push through collective consensus， and require official bilateral creditors to follow it through. Bilateral creditors， on the other hand， expect multilateral institutions to provide greater financial and liquidity support. In fact， even the top-down collective relief approach varies markedly in practice， due to the different national conditions of debtor countries.

Thirdly， the compatibility among debt management approaches. The Paris Club used to dominate debt relief for developing countries， but its relevance in sovereign debt treatment is in decline as the share of official loans from Western countries has dropped. In contrast， emerging economies including China are becoming major sources of bilateral loans for developing countries. In the case of China， it has developed its own principles for sovereign debt treatment， including greater emphasis on sustainable development and the reluctance to write down loans directly. In the meantime， debtor nations have begun to explore a third way of debt management， including setting up groups of borrowers corresponding to groups of creditors. Private creditors have also adopted more sophisticated means of debt treatment based on contracts or collective action clauses. There is a need indeed to integrate those debt treatment efforts.

Implications of the Sovereign Debt Politicization

Due to geopolitical competition and major country rivalry， the debt issue， which should be on the development agenda， has been politicized. As several developing nations are mired in debt crisis， some countries have launched the “Blame China” campaign to hurl groundless accusations at China， by framing the debt trap theory and exaggerating issues such as invisible debt and transparency. In disregard of the fact that debt restructuring negotiations are time-consuming and difficult， they are blaming China for the slow progress. Debt politicization is taking a great toll on international debt management， as it has formed a wrong perception of the debt issue， held back the establishment of mechanisms and norms in debt cooperation， and exacerbated the collective action dilemma in debt relief.

First， a false perception of the debt issue is formed. It is nothing unusual for nations to have debts， which can be attributed to both domestic and international factors. Once the debt issue is politicized， the root causes behind can hardly be recognized. The spread of conspiracy theories and anti-intellectual arguments among the public， media， politicians and even policymakers has further entrenched the negative image of China， which may lead to biased and irrational decision-making at national level. It has greatly distorted the perception of China by the international community and stood in the way of cooperation that could have taken place. For instance， although the so-called debt trap has been disproved by research， some Western politicians are still reluctant to interpret Chinas policies in an objective way， still less acknowledge Chinas contribution and role. In the same vein， the US has accused China of failing to properly follow through the DSSI， even though China， holding only 30% of the total repayable debt， has contributed to 63% of debt relief. As a result， attention has been distracted from the fundamental obstacle for the coordination among creditors， which is their competing interest. Other priorities of greater significance for developing countries may also be overlooked， including investment， trade and new financing.

Second， sovereign debt relief becomes more difficult. The politicization of the debt issue has exaggerated differences between China and traditional creditors， widened the China-US trust deficit， and held back debt relief consensus and solutions. The US accuses China of adopting unconventional practices that differ from those of Western countries， including excessive confidentiality requirements， lack of transparency， circumvention of Paris Club terms， and reluctance to write down debts. In Chinas view， however， the US shunning the issue of private creditors is the crux of debt default by developing countries. Mistrust between China and the US has become a major factor standing in the way of international debt cooperation.

Third， debt relief is hardly effective. Debt politicization has distracted efforts to address the debt issue， thus impairing the effectiveness of international debt relief. The reasons behind are three-fold. Firstly， major creditors including private and multilateral financial institutions do not participate in debt relief and management. The limited debt relief can only be enjoyed by low-income countries. Secondly， the limited debt relief as a result of arduous negotiations can be easily undermined by financial policies of developed economies， which will once again impose heavy burdens on developing countries. For example， the interest hike of the US dollar was the last straw to bring Sri Lanka to its knees. Currency devaluation has led Ghanas foreign debt to soar by $ 6 billion， which has resulted in its announcement to stop paying most of its debts. Thirdly， because of the deficit in global governance and the lack of coordination among major countries， benefits unleashed from debt relief can be easily counteracted by challenges such as the high inflation caused by price surge of food and fuel.

Responsibility of Major Countries in Responding to the Sovereign Debt Crisis

The debt crisis has highlighted the importance of global political， economic and financial stability， and of coordination and cooperation among major countries. The debt crisis faced by developing countries can hardly be addressed without greater international cooperation， and a more equitable international debt management framework put in place through the coordination among major countries.

I. Strengthening Coordination and Cooperation Among Major Countries in International Debt Management

First， trust is the basis of international cooperation. The top priority for now is for major countries to rebuild mutual trust. They need to reach the common understanding that developing countries are not the arena for major country rivalry， but the stage for international cooperation， and shoulder their moral duties in global governance. Major countries should abandon the Cold War mentality， and perceive each others positive role in international development cooperation in an objective and rational manner. They should stop the wrong practice of asking developing countries to take sides， focus instead on solving their debt crisis and development challenges， and promote the de-politicization of international development cooperation.

Second， major countries should assume their international responsibilities. When they formulate policies， the spillover effects on developing countries must be fully considered. Advanced economies should draw lessons from the great damage their interest hikes have done on developing countries， and move faster to meet their financing commitments， including those on special drawing rights and new financing support. Developed economies including the US should do more to adopt and adjust macroeconomic policies and laws from the perspective of preventing debt crises， so as to ensure the stability of the international financial system， and that less developed nations can also benefit from liquidity expansion.

Third， true multilateralism should be acted upon to enable multilateral mechanisms such as G20 to play a greater role in dealing with the debt crisis. The G20 was instrumental in addressing the 2008 financial crisis. Such experience should be drawn by major countries to step up coordination and cooperation in multilateral mechanisms， and come up with viable solutions to the debt crisis confronted by developing nations.

II. Promoting the Building of an International Debt Management System That is Fair， Fquitable and Effective

International debt relief has always been controversial， be it in the form of the Heavily Indebted Poor Countries （commonly addressed as HIPC） in the 20th century or the DSSI. International debt management is complex and painstaking， which cannot be measured simply in terms of bailout or moral standards. As we provide emergency debt relief， it is of greater significance to reflect on the structural conundrum that why such relief cannot prevent new crises from happening. Systematic solutions are needed to address the debt and development problems of developing countries.

First， mechanisms， procedures and rules for sovereign debt relief must be optimized to stay relevant. To get the emergency financial support from the IMF， the applicant country must first get done the debt restructuring with its creditors. The reality is， however， that debt restructuring is often time-consuming. It means that countries in debt distress are often unable to obtain emergency support within a short time. With the collective approach of bilateral first， then private， the fair sharing of responsibility in debt relief can hardly be addressed. This has become one of the largest barriers in debt relief. It is imperative to provide flexible and pragmatic debt relief arrangements in light of specific realities through close communication at bilateral and multilateral levels， and also with private creditors.

Second， mutual learning is needed to leverage the complementarity between traditional and emerging creditors. Developed countries， represented by the Paris Club， and private financial institutions， mostly in the West， have gained much experience in sovereign debt treatment， which has given rise to rules， standards and approaches that underpin the current international debt governance. China and other emerging economies have carried out a host of debt relief and restructuring at bilateral level， with remarkable results in some countries. Traditional and emerging creditors should strengthen the sharing of principles， approaches and best practices in debt treatment， so as to bring out the best effect in sovereign debt management.

Third， greater efforts should be devoted to the balance between debt and development sustainability. The debt issue， in essence， is about development. Addressing the debt issue， at the end of the day， hinges upon national development. In the same vein， the priority in international debt treatment should be to help developing nations restore and improve their economic capability. To achieve the end， the international development cooperation shall be comprehensive， coordinated and effective， and the role of trade， investment， assistance and financing well leveraged. Developed countries and emerging markets also need to better coordinate and cooperate， so as to jointly promote global economic governance and uphold the international financial architecture.

Conclusion

The international debt management is characterized by the complexity， fragmentation and politicization of the debt issue. As developing countries are faced with greater challenges in development， the deficit in global governance becomes more prominent. To a large extent， the slow progress and ineffectiveness in international debt relief can be attributed to the lack of coordination among major countries as a result of their political rivalry. The dilemma nowadays in international debt management is more of a product of geopolitical competition and major power confrontation. Therefore， the fundamental solution in preventing and coping with the debt crisis lies in putting in place an international debt management system that is fair， equitable and effective. Debt management will not get improved without efforts of major countries to restore trust， assume responsibility and strengthen cooperation. Faced with the debt issue in the developing world， Western countries should refrain from politicizing the problem， step up communication and cooperation， genuinely aim for the well-being of developing countries， and promote the building of a more effective system of international debt management.

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Zhou Yuyuan is Deputy Director at the Center for West Asian & African Studies of Shanghai Institutes for International Studies