Report issue storm warning for bond holders

After Asia and Latin America, Africa is likely to confront a bond crisis caused by "reckless operations" of European and American financial institutions, according to a Tsinghua University report issued on Wednesday.

The report is the outcome of a project conducted by a research team led by Tang Xiaoyang, a professor in the Department of International Relations at Tsinghua University. It said that from 2023 to 2025, African countries will enter a bond repayment peak, with hundreds of billions of dollars in bonds maturing, and many low- and middle-income bond-issuing countries could be at risk of default.

Such risks were brought about by the "reckless operations" of large European and American investment institutions in African countries. If the latter fail to refinance, they will face a chain reaction of defaults, ratings downgrades, foreign exchange shortages and currency depreciation, which may lead to further economic recession. The current global economic downturn means the default crisis is likely to develop into a comprehensive challenge to the economic conditions, currency values and even political stability of dozens of low- and middle-income bond-issuing countries, said the report.

The bond problem of developing countries has become an immense threat to the global economic recovery since 2020. Sri Lanka, Zambia and Argentina have successively defaulted on their bonds, triggering serious economic and social unrest. This trend may soon spread to Ghana, Suriname, Angola, Ethiopia, El Salvador and other developing countries, Tang said.

This round of bond crises was mainly caused by an excessive increase in international bond issuance. The stock of sovereign bonds, mainly Eurobonds, of all low- and middle-income countries rose significantly from $484.3 billion in 2009 to nearly $1.74 trillion in 2020, accounting for more than half of their external debt. Moreover, high bond interest rates and interest payments that account for 63.2 percent of the total interest expenses have become main contributors of debt pressure on bond-issuing countries, he said.

The stock of Sub-Saharan African countries' sovereign bonds has grown particularly fast, with the value rising drastically from $22.6 billion in 2009 to $136.6 billion in 2020, and more than 20 African countries have issued Eurobonds. At the same time, most international bonds are denominated in the US dollar. During the currency's interest rate hike, the double rise of the exchange rate and interest rate has significantly increased the repayment pressure facing bond-issuing countries, he said.

The surge in bond issuance and bond crises in African countries stems from international financial capital's provision of loose and convenient measures to developing countries during their economic downturn, which encouraged these countries to issue Eurobonds so that the international financial capital – mainly well-known investment institutions in Europe and the United States – can reap high yields from the rapid growth of emerging markets. However, as developing countries have vulnerable economic structures and lack financial risk management experience, they had difficulties dealing with the superimposed impacts of multiple adverse factors engendered by the global economic downturn. Many countries have been forced to issue new bonds with higher interest rates in order to repay old debt, forming a vicious circle in the medium and long term, according to the report.

The rules of bond issuance and circulation formulated by financial institutions in developed countries prioritize the commercial interests of financial institutions and the needs of developed economies, while failing to fully account for the characteristics of developing countries, such as a single revenue source, weak capacity for risk management, and need for long-term infrastructure construction.

The pro-cyclical, market-oriented behavior of issuing Eurobonds has amplified economic fluctuations in developing countries. The sharp reduction in public expenditures caused by the bond repayment peak and refinancing difficulties may bring an abrupt end to the economic structural transformation of developing countries over the past decade, said the report.

It calls on the international community to cooperate, take timely preventive measures, create an international financial environment which nurtures sustainable development of developing countries, and to avoid the spread of sovereign bond defaults.