U.S. urges action on ‘generational’ debt risks, calls out China

The world’s largest creditors should take coordinated and decisive action to address the “generational challenge” of poorer nations struggling with unmanageable debt burdens, a top U.S. Treasury official said, aiming specific criticism at China, the biggest lender to emerging markets.

Jay Shambaugh, U.S. Treasury undersecretary for international affairs, set out in a speech Thursday the U.S. vision for international finance that calls on official and private creditors, as well as international financial institutions.

Low and middle-income countries committed to ambitious economic and climate goals should be able to access financing for investments without facing debt distress, he said. Yet too many of them are experiencing net negative financial flows – when debt repayments are higher than inflows from fresh financing.

For more than 40 such countries, cumulative net debt flows from Chinese creditors since 2019 are now negative, Shambaugh said in the speech, at the Peterson Institute for International Economics in Washington.

“No individual creditors should be free-riding by pulling funds out of a country” while it’s implementing a program backed by the International Monetary Fund or other multilateral lenders, and while other creditors are refinancing, rolling over or injecting new funds, he said.

Shambaugh, who has led U.S. talks with China recently on financial and economic issues, said the issue of debt distress has come up in every U.S.-China engagement over the past two years, including discussions with Treasury Secretary Janet Yellen.

“What we have been trying to do, as a creditor who has been around longer and who has been through more of these, is to try to make sure we can talk to the Chinese about how their system can get to ‘yes’ faster,” on restructurings, he said after the speech.

“But also how we can make sure the global system is working in a way that works better for their system, and so that everybody understands each other,” he said, adding that both sides see it as a shared global challenge they should cooperate on rather than just a bilateral issue.

Shambaugh in his speech also called on private lenders to support poorer countries through net-positive financing and for international financial institutions to coordinate their assistance.

“The overall international financial system can help low- and middle-income countries face the challenges they’re seeing,” Shambaugh said, “especially at this particularly high-stakes moment in sustainable development.”

When asked about Shambaugh’s remarks, Chinese Foreign Ministry spokeswoman Mao Ning said at a regular briefing in Beijing on Friday that her nation “attaches great importance to the debt issues of developing countries.”

“We will always help the debt burden of developing countries” and help them sustainably develop, she added.

Developing nations spent a record $443 billion on debt service payments in 2022, according to the World Bank, which has warned the situation risks tipping them into crisis and creating a “lost decade” of economic stagnation.

More than 50 low-and middle-income countries experienced net outflows of public debt to official bilateral lenders over 2021 and 2022 – the most in nearly 20 years, Shambaugh said, adding that almost 70 such countries had debt outflows to private creditors in 2022, a record.

“Many countries operating in good faith are caught in these conditions with significant official bilateral and market debt and facing alarming trade-offs due to falling flows and rising debt service,” he said.

Shambaugh’s remarks come less than a week before the world’s top economic policymakers gather in Washington for the International Monetary Fund’s spring meetings. The issue of how to deal with the debt burden faced by low income nations is expected to feature prominently in their discussions.

The meetings come amid growing concerns over the slow progress of restructuring talks for countries like Zambia and Ghana, which had engaged in a process known as the Common Framework, a program to restructure debts launched in 2020 by the Group of 20, World Bank and IMF.

The framework’s ambitions included bringing traditional lenders from the so-called Paris Club – mostly rich, Western creditor nations – around the table with emerging creditors, notably China and the private sector.

But that process has drawn criticism for moving forward at a dangerously sluggish pace, leaving defaulted countries suspended for years while dissuading others near bankruptcy from seeking help.

Beijing has emerged as a massive creditor to developing economies over the past decade as part of Xi’s Belt and Road Initiative, which focused mainly on Chinese-built infrastructure. Those funds came through a variety of channels, including the Export-Import Bank of China and China Development Bank, as well as through state-aligned commercial banks or state-owned enterprises.

—With assistance from Colum Murphy and Philip Glamann.