A strong dollar worsens the debt cycles of poor countries

The stark warning from Federal Reserve Chairman Jerome Powell of Jackson Hole, Wyo., that the bank will continue to raise interest rates until “the job is done” strengthened the high value of the dollar for decadesworsening the vicious and unsustainable debt cycle of developing and emerging countries.

As the dollar appreciated, these economies found it increasingly difficult to repay their dollar-denominated debtbecause they had to exchange more local currency and draw on the hard currency reserves of their central banks, a safety cushion protecting the liquidity of a currency.

Crushing debt increases the risks of countries’ economic collapse, with scenes of social unrest, as we saw in Sri Lanka in June, probably become more common nightmares for rich countries.

Troubled debt has reached a quarter of a trillion dollars, according to Bloomberg. Lebanon, Sri Lanka, Russia, Suriname and Zambia are already in default. Of some 73 heavily indebted countries tracked by the International Monetary Fund (IMF), about 40 are in the danger zone.

The Stop COVID-19 world had already increased the debt burden of countries, and with Mondial economy now suffers from inflationary fever, food shortages, supply chain bottlenecks and Russia’s strangulation of energy supplies, low-income countries have failed to recover. Poor decision-making by the leaders of these governments also played a role.

Judging by news reports, Powell or Treasury Secretary Janet Yellen have said little in public about the impact of the rising dollar on the sovereign debt of poor countries.

In July, Powell used a Fed-sponsored conference on the dollar’s global role in touting the currency’s benefits and unparalleled status. His justifications for the Fed’s inflation-cutting strategy repeatedly focus on the domestic market. In the words of Powell, is it “rational inattention”?

Yellen’s emphasis on G-20 meetings has been on a oil price capstrengthening the Ukrainian economy and pressuring China to reveal more about its loan agreements and restructure the debt of low-income countries.

Little has also been said by President Biden or other key members of the administration about the upcoming defaults.

Elevating the situation to top priority, with Powell and Yellen being more expansive in their remarks on the sovereign debt crisis, is a necessary and urgent step to start managing the results. They should also establish US leadership, especially by gaining the support of wealthier nations to use their collective influence in negotiations with private creditors.

The first item on the agenda should be the immediate suspension of interest payments for the time being to give countries “breathing room”, as some specialists have proposed.

A baseline assessment is urgently needed from the World Bank and IMF, one that uses realistic projections of the economic outlook to better understand each country’s likelihood of servicing debt. Their efforts should include obtaining information from China on the amount and terms of its loans, which represent 18% of credits due by 68 countries.

Debt restructuring should be pursued, but coordination is more difficult given the diversity of creditors and their terms. The G20 Common Framework is a starting point for resolving insolvency and prolonged liquidity issues. Negotiations must begin now regarding the volume, speed and terms of the fresh money.

A roadmap for solutions is that offered by the Center for Global Development. It calls for clearer steps and detailed timelines while strengthening incentives for private creditors to rework loan terms. Better integrate IMF financing programs, such as itslend latein the framework could respond to the recalcitrance of private and public creditors.

Restructuring, too, should use conjunctural mechanisms, Brooking suggests. Brady Bonds are one of those tools. By converting sovereign debt into US dollar-denominated securities backed by US Treasuries, commercial banks could replace non-performing debt on their balance sheets with marketable securities. It was also a question of linking these notes to economic reform commitments.

In panic mode, stock markets exaggerate the risks, exponentially increasing the costs of ending a debt crisis. Efforts now to initiate immediate responses and reach agreement on medium- and long-term responses could ease investor angst. With the wake-up call sounded repeatedly by the world Bank and the IMFthe United States must begin working on approaches to contain and reduce the debt crisis.

James David Spellman is a director of Strategic Communications LLC after working in the securities industry.