Emerging markets debt crunch

This is an audio transcript of the FT News Briefing podcast episode: ‘Emerging markets debt crunch’

Joanna S Kao
Hi, I’m Joanna Kao. I’m filling in for Marc today. Before we get to today’s briefing, I want to tell you about a new series from our fellow podcast Behind the Money. Over the next five weeks, Behind the Money: Night School will be your guide to the biggest economic stories of 2023. FT journalists will give crash courses on major developments. Behind the Money: Night School runs on Mondays starting April 17th. Subscribe today to hear it. We’ll have a link in the show notes. See you in class.

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Good morning from the Financial Times. Today is Thursday, April 13th, and this is your FT News Briefing.

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Germany is split again over its business ties with China. The world’s poorest countries are struggling to pay back their loans.

Jonathan Wheatley
A lot of them are struggling very much indeed making those payments while trying to deal with all the other crises that are hitting them.

Joanna S Kao
We’ve got the latest US inflation numbers and Donald Trump’s latest move. I’m Joanna Kao, in for Marc Filippino, and here’s the news you need to start your day.

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Former US President Donald Trump has sued his former lawyer Michael Cohen. Cohen once said he would take a bullet for Trump. Then he became a central witness in the “hush money” case that Manhattan prosecutors now are bringing against the former president. Trump is seeking at least $500mn for alleged breaches of contract and confidentiality agreements. He filed his lawsuit a few weeks after Cohen repeatedly testified before a grand jury about Trump’s $130,000 payment to porn actress Stormy Daniels to buy her silence before the 2016 election.

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The latest US inflation numbers came out yesterday. The pace of consumer price increases in March eased to 5 per cent year on year. That’s the lowest in nearly two years. Here’s our US economics editor, Colby Smith.

Colby Smith
The headline number is lower than we’ve seen in quite some time. But I think the most important figure in the data we’ve seen is really the core measure of inflation. Now that strips out volatile items like food and energy costs. And if you look at that metric, you see perhaps a little bit more worrisome picture in terms of price pressures. So prices in these categories rose by 5.6 per cent year over year. That’s after another 0.4 per cent monthly jump. So for economists and policymakers, that’s probably the key metric that they’re paying attention to because it’s a good gauge of underlying inflation, inflation that’s perhaps driven by demand as opposed to kind of supply disruptions and other kind of distortions.

Joanna S Kao
So, Colby, what could this mean for policymakers at the Federal Reserve and their decision on interest rates?

Colby Smith
So I think most Fed officials are gonna take in the latest data as further indication that they potentially have more work to do. That’s what we’ve already heard, both just before and after the data was released. So Mary Daly, who’s the president of the San Francisco Fed, said something along those lines. We’ve heard from John Williams of the New York Fed that, you know, one more interest rate increase is a reasonable starting point. So it seems like officials are tacitly endorsing another interest rate increase. But where we are starting to see a little bit of divergence forming is just how concerned officials are about the extent of the credit crunch potentially forthcoming as a result of the recent banking turmoil. So Austan Goolsbee, who’s the new president of the Chicago Fed and he’s a voting member on the policy-setting committee this year, he issued the strongest warning earlier this week when he said, you know, there could very well be a material impact from the banking stress, and that could well mean that monetary policy just has less to do here in terms of getting the inflation result that they’ve been aiming to achieve.

Joanna S Kao
Colby Smith is the FT’s US economics editor.

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Developing countries have to borrow money to build infrastructure, schools, roads and create jobs. But a new study from the British non-profit Debt Justice shows that the amount of money these countries are spending to repay what they’ve borrowed from foreign lenders has risen to its highest level in 25 years. We spoke to our emerging markets correspondent Jonathan Wheatley about what this means for these countries.

Jonathan Wheatley
A lot of them are struggling very much indeed making those payments while trying to deal with all the other crises that are hitting them from the pandemic, food inflation caused by Russia’s invasion of Ukraine and all the challenges that they face in just keeping up basic spending on health and education and infrastructure and now, of course, climate change challenge.

Joanna S Kao
So Jonathan, to me, these debt repayments sound a bit like a huge, dark, looming cloud. How would you describe it?

Jonathan Wheatley
Well, but that’s not a bad description of it at all. And the thing . . . but the thing is, it’s not just looming. It’s actually here. A lot of countries have already defaulted on their external debt. Zambia was one of the first high-profile cases of default back in 2020 at the start of the pandemic. We had Ghana that defaulted last December. We had Sri Lanka in the middle of last year. A whole bunch of countries. And those are not just low-income countries. Sri Lanka is more of a middle-income country, and particularly for a lot of these countries, the cost of servicing local currency debt, debt issued in their own countries, is on top of this, this rising cost of external debt. And that has gone up much more. Local interest rates have gone up a lot more than global interest rates.

Joanna S Kao
What happens if they can’t pay back their debts?

Jonathan Wheatley
Well, they can’t pay back their debts in many cases because they’ve run out of money. I mean, literally. Sri Lanka was a prime example where all the dollars that they had, which are used for not just paying off debts, but buying vital imports, things like medicines and food that people just can’t do without. They’re running out of dollars. So when they default, that’s a sign of extreme stress. There were months of riots on the streets in Sri Lanka before they eventually defaulted. Ghana had a lot of social unrest as well. And when they actually default, debt markets are closed. They can’t borrow anymore. They can’t raise finance. And quite often they get stuck in a limbo where they’re trying to reach an agreement with their foreign creditors. And in many cases, as I said, their domestic creditors as well, and it’s extremely difficult for them.

Joanna S Kao
Jonathan, the last time developing countries faced a huge debt crisis, there were a lot of write-offs. A lot of the debt was forgiven. But a lot has changed since then, right?

Jonathan Wheatley
Well, the big thing that has changed this century is the rise of China particularly, but also India and Saudi Arabia and other big developing economies as lenders. And one thing that’s been very problematic is that China, although it is regarded as an official bilateral lender, it does a lot of its lending through state banks and others, and it does it on commercial or quasi commercial terms. Quite a lot of its lending is quite opaque. And now it’s suddenly finding itself, you know, the old saying is if you owe the bank $100, it’s your problem. If you owe the bank a million dollars, it’s the bank’s problem. And suddenly China is finding itself with the bank’s problem, that it’s lent an awful lot of money and people are unable, not just unwilling, but unable to pay it back. As I mentioned, Zambia defaulted two and a half years ago, and pretty much everybody will agree that the thing that’s holding it up is agreement from China on what sort of writedown it’s prepared to accept in its loans.

Joanna S Kao
Jonathan Wheatley is the FT’s emerging markets correspondent. Thanks, Jonathan.

Jonathan Wheatley
Thanks very much.

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Joanna S Kao
Before we go, Germany is reconsidering a decision to allow a Chinese company to buy a stake in a German container terminal. Two years ago, the Chinese shipping conglomerate Cosco agreed to buy a stake in a terminal in Hamburg. Several ministries objected, but chancellor Olaf Scholz allowed the deal to go through. But then the terminal was classified as critical infrastructure. And now officials are reviewing the deal. This latest debate over the China deal could redivide Germany’s government. And it comes just as Germany’s foreign minister is preparing to make her first trip to China.

You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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