UN warns of possible default by Brazil and other developing countries

RIO DE JANEIRO, BRAZIL – According to the UN, 42 economies that borrowed in capital markets have suffered sovereign downgrades since the beginning of the pandemic, being six developed countries, 27 emerging economies, and nine underdeveloped countries. In the last year alone, according to António Guterres, secretary-general, six countries have defaulted on their foreign debts: Argentina, Belize, Ecuador, Lebanon, Suriname, and Zambia.

The UN issues a warning: “such downgrades increase borrowing costs, particularly for developing countries, which may, in turn, increase the risk of more nations having unsustainable debts. The risk becomes even greater if the pandemic lasts longer than anticipated.

Countries that do not have relevant debt in dollars, such as Brazil and South Africa, are also at risk of default in the coming months. In the case of Brazil, according to Guterres, the point is the reduction in the average debt term – which can culminate in a much bigger problem shortly and put an end to the “illusion of sustainability” that exists here. As a result of the secretary general’s statement, the dollar renewed the high of the last few weeks, hitting the R$5.80 mark.

“There is a real risk of losing control of the debt dynamics if we do not stabilize more quickly the impressions about the federal government that is suffering repeated crises. The crisis this week is the possible exit of Chancellor Ernesto Araújo, and the discussion about this undoubtedly eclipses the agenda of reforms and other measures,” says André Perfeito, chief economist at Necton. In fact, the minister resigned early this Monday afternoon (29).

How to solve the problem

For Guterres, some actions can prevent countries from getting even more indebted and causing a hole in the International Monetary Fund (IMF).

The first one is debt relief. In this item, the Secretary-General stresses the need to make new loans, which “can lead to improved credit quality” by “financing productive investments,” which “can free up resources, create conditions under which countries can return to voluntary market access, and reduce overall borrowing costs, with positive impacts throughout the economy”.

Another proposal made by Guterres is greater assistance offered to smaller and developing countries.

He said governments must provide new financing for nations to recapitalize their multilateral development banks and accelerate the timetable for replenishing funds and meeting official development assistance (ODA) commitments. The goal is also to provide financing for developing countries for long-term investment.

The Secretary also calls for the G20 to extend the World Bank Debt Suspension Initiative (DSSI) to the end of June 2022 and include middle-income countries severely affected by the crisis.

Also, he calls for higher-income countries to make more robust investments in the IMF via the Sales Development Representative (SDR), which could prevent greater problems in the coming years, according to Guterres.

“I am encouraged to see that our insistence on the need for a new allocation of Special Drawing Rights by the IMF, and the reallocation of unused SDRs to support vulnerable countries, including middle-income ones, is now gaining widespread acceptance. Let’s make sure that it happens – and that it is managed properly for the benefit of the developing world,” he said.

Source: CNN Brasil