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Should We Consider Debt Cancellation For Poor Countries?

Debt Cancellation
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EDITOR NOTE: The COVID-19 pandemic has strained the capacity for many of the poorest nations to repay their debts. Collectively, 100 million citizens are on the verge of extreme poverty, unless banks and private investors are willing to allow these countries to cancel their debts. Will lenders from across the globe be willing to absorb the ensuing losses? It seems like a lose/lose scenario. For even if lenders and investors hold steadfast to the current terms, should the arrangement plunge the borrowing nations into an even deeper financial crisis, what returns might these investors expect from nations in ruins?

The COVID-19 pandemic could trigger a debt crisis in some countries, so investors must be ready for granting some form of relief that could also include debt cancellation, World Bank President David Malpass was quoted as saying on Sunday.

“It is evident that some countries are unable to repay the debt they have taken on. We must therefore also reduce the debt level. This can be called debt relief or cancellation,” Malpass told Handelsblatt business daily in an interview.

“It is important that the amount of debt is reduced by restructuring,” Malpass added.

He pointed to similar steps in previous financial crises such as in Latin America and the so-called HIPC initiative for highly indebted countries in the 1990s.

Rich countries last month backed an extension of the G20’s Debt Service Suspension Initiative (DSSI), approved in April to help developing nations survive the coronavirus pandemic, which has seen 43 of a potential 73 eligible countries defer $5 billion in “official sector” debt payments.

Amid warnings the pandemic could push 100 million people into extreme poverty, Malpass renewed his call for private banks and investment funds to get involved too.

“These investors are not doing enough and I am disappointed with them. Also, some of the major Chinese lenders did not get enough involved. The effect of the aid measures is therefore less than it could be,” the World Bank head said.

Malpass warned that the pandemic could trigger another debt crisis as some developing countries had already entered a downward spiral of weaker growth and financial trouble.

“The enormous budget deficits and debt payments are overwhelming these economies. In addition, the banks there are getting into difficulties due to bad loans,” Malpass added.

Originally posted on Reuters

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