Launch of Report “The Trap of Financial Capital: The Impact of International Bonds on the Debt Sustainability of Developing Countries”

On August 3rd, 2022, a team from Department of International Relations Tsinghua University, led by Professor Tang Xiaoyang, published a research report entitled “The Trap of Financial Capital: The Impact of International Bonds on the Debt Sustainability of Developing Countries”. This is the outcome of a six-month-long special project conducted by the research team, which mainly consists of members from Nexgen Forum.

The report indicates that from 2023 to 2025, African countries will enter a bond repayment peak with hundreds of billions of dollars in bonds maturing, and could face default risks, impacting dozens of low- and middle-income bond-issuing countries.

As one of the report’s conclusions, these risks were brought on by the “reckless operations” of large European and American investment institutions in African countries. And if the latter fail to refinance, they will face a chain reaction of default, rating downgrade, foreign exchange shortage, and currency depreciation, leading to further economic recessions.

Under the current global economic downturn, the default crisis is likely to develop into a comprehensive challenge to the economic conditions, currency value, and even political stability of dozens of low- and middle-income bond-issuing countries.

As the report indicates, since 2020, the bond problem of developing countries has become an immense threat to the global economic recovery. 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.

This round of bond crises was mainly caused by the excessive increase in international bond issuance. After 2008, the stock of sovereign bonds (mainly Eurobonds) of all low- and middle-income countries (LMCs) rose by nearly 400% within twelve years to reach $1,737.2 billion in 2020, accounting for over 50% of their external debt. Moreover, high bond interest rates and interest payments that account for 63.2% of the total interest expenses—which are far higher than traditional bilateral and multilateral debts—have become the main contributors of debt pressure on bond-issuing countries. Among them, the growth rate of the sovereign bonds of African countries is particularly alarming, as it has quintupled in ten years and more than 20 African countries have issued Eurobonds. At the same time, most international bonds are denominated in the U.S. dollar. During the interest rate hike of the U.S. dollar, the double rise of the exchange rate and interest rate has significantly increased the repayment pressure facing bond-issuing countries.

The report also points out that the surge in bond issuance and bond crisis in African countries stems from the international financial capital (mainly well-known investment institutions in Europe and the United States)’s provision of loose and convenient measures to developing countries during the economic downturn of developed countries, which encouraged developing countries to issue Eurobonds so that the international financial capital can reap high yields from the rapid growth of emerging markets. However, as developing countries with vulnerable economic structures that lack financial risk management experience were introduced to the trap of high risks in the international capital market, 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 cycle in the medium and long term. They are falling into the development trap under seemingly fair rules due to short-term interests and are likely to prematurely overdraw their growth prospects and become shackled by the international financial capital.

According to the report, western media and research institutions have seriously neglected the impact of international bonds on national sovereign debt. The report systematically analyzes the negative impacts of Eurobonds, pointing out that the market-oriented behavior based on the financial systems of developed countries is not completely suitable for small and fragile developing economies. The rules of bond issuance and circulation formulated by the 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 single revenue sources, strong cyclicality, 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. It will take a long time to recover the gains that predate the liquidity crisis. The severe impact of cyclical bond repayment has led many developing countries to fall into a vicious cycle of unsustainable economic growth in modern history.

The report summarizes the lessons learned from Eurobond issuance in developing countries and calls for the international community to cooperate with each other, take timely preventive measures, create an international financial environment which nurtures the sustainable development of developing countries, and avoid the spread of sovereign bond default.



The full report can be downloaded here