World teeters on a $235trillion debt mountain – and there is no ‘magic wand’ to wipe it away, warns head of the World Bank

“I wish there was a magic wand that said hocus-pocus,” said the new president of the World Bank when talking about the debt problem facing developing countries.

Ajay Banga’s comments illustrate some of the seemingly intractable issues facing the great and good of global finance who have been gathering in Marrakech this week.

With the heat in the mid-thirties, the joint meetings of the International Monetary Fund (IMF) and the World Bank are meant to be a place where cool heads with an eye for financial spreadsheets can find common ground.

And until a few days ago, the clear blue skies over the Moroccan city seemed to herald more optimistic prospects for the global economy.

Indeed, Treasury Secretary Janet Yellen flew in from Washington insisting that the “pessimism” surrounding the shindig when it was held in the United States a year ago had proven unwarranted.

However, Yellen had to acknowledge that events on the other side of the Mediterranean, after Gaza terrorists launched a horrific attack on Israeli civilians, had cast a shadow and could pose a new challenge to the global recovery by pushing up prices. oil prices.

It is not the only cloud on the horizon: the war in Ukraine continues to take its toll, the battle against inflation is not yet won and the prospect of interest rates remaining high for longer threatens to delay the recovery.

And while many, including Yellen, talk about the prospects for a so-called “soft landing,” the projected recovery is anything but triumphant, and IMF forecasters see the global economy as “limping, not running.”

That’s before even mentioning the challenges of trying to wean the world off fossil fuels in a way that is fair to developing countries that lack the resources to make the switch and who in many cases will be hardest hit by the shift. climate change.

All this while the world reels from a $235 trillion mountain of debt, and relations between the United States and China, the world’s two largest economies (and those with the most debt), strained at a time when the consensus is more necessary.

The disputes extend to who provides financing and makes decisions at the IMF.

At the same time, China’s emergence as a major lender to poorer countries has become a major headache.

A key problem is what happens when one of those borrowing nations is struggling and needs to restructure that debt, and lenders must accept a so-called haircut: getting back less than they expected.

Without the various lenders being transparent with each other, some of them will be reluctant to accept such conditions if they believe that others will not have to suffer.

“First you need to know the facts and then you can sit together and negotiate how to reduce that debt,” Banga said.

‘I think that’s the right way to do it.

‘I wish there was a magic wand that said hocus pocus, we will simply erase the debt from the system. I don’t think that will happen. A meeting between Janet Yellen and China’s central bank governor Pan Gongsheng in Marrakesh should aim to smooth over these issues.

Positive outlook: Treasury Secretary Janet Yellen arrived from Washington insisting that the “doom and gloom” of last year’s event had proven unwarranted.

But the debt burden faced by richer countries is also a problem.

As the IMF notes, the United States and China account for 30 percent and 20 percent of global debt, respectively. These are examples, says Vitor Gaspar, director of the fund’s fiscal affairs department, of countries that are on an “unsustainable fiscal path.”

With debts already high and the cost of servicing them rising – while public expectations about the role of the state have risen post-pandemic, “something has to give to balance the fiscal equation” – despite what he acknowledges is an “aversion widespread” to taxing.

It is difficult for finance ministers to address this issue with voters.

And that is certainly the case for UK Chancellor Jeremy Hunt, who is in Marrakesh this week for high-level meetings with his ministerial counterparts and who is already presiding over a tax burden in his country that is set to become the highest since war.

However, the IMF believes that Hunt is on track to miss his goal of reducing debt levels.

Some of the solutions to the world’s problems seem simple when discussed in air-conditioned tents shielding ministers and officials from the scorching heat.

Banga used a climate event to talk about possible emissions reductions if only Indian rice farmers could be persuaded to change the way they irrigate their fields.

At other times, the level of discussion is enough to confirm the opinion of anyone who is skeptical about the ability of global elites to solve problems.

“We need to move from the culture of finger-pointing to the culture of hand-holding,” IMF Managing Director Kristalina Georgieva intoned at the same meeting, theatrically extending her hand to catch Banga’s word.