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Women take part in a ritual event of naked festival, for the first time in its 1250 years of history, at Owari Okunitama Shrine, also known as Konomiya Shrine, in Inazawa, Aichi Prefecture, central Japan February 22, 2024.
Hard Numbers: Japanese women go to naked party, Australian fires rage, French farmers fume, and Zambian creditors get paid.
1250:Washoi! Women crashed the party at Japan's 1250-year-old Naked Festival, a traditionally all-male event designed to drive out evil spirits. While they didn’t actually bare all, the first-ever female participants successfully trampled gender norms while ensuring that the festival continues as Japan’s population ages.
2000: Wildfires have forced more than 2,000 people to flee towns in western Australia. Prime Minister Anthony Albanese pledged all necessary assistance to combat the blazes, which are being exacerbated by an El Niño weather pattern known to fuel fires, cyclones and droughts.
1 : Angry French farmers delayed the opening of a major Paris farm fair by one hour, protesting costs, bureaucracy, and environmental regulations. Amid calls for his resignation, President Emmanuel Macron promised to meet with union representatives and stakeholders. European governments are concerned that the farm lobby could feed gains by the far right in European Parliament elections this June.
13 billion: Zambia’s 13bn mountain of debt is a little lighter today, thanks to deals struck with creditors China and India. It’s welcome news as the African nation contends with past defaults, depreciation of the kwacha, a revival of inflation, and a drought that was “one of the worst in living memory.” Zambia now plans to resume talks with private creditors and is back on track for a 1.3 billion bailout by the IMF.Eyewitness footage shows explosion at military industry factory in Isfahan, Iran.
What We're Watching: Iran weapons depot targeted, fierce battles in eastern Ukraine, Czechs back pro-EU president, McCarthy-Biden debt limit meeting
What we know about the Isfahan attack
In what’s broadly believed to have been an Israeli attack, three drones hit an Iranian ammunition factory in the central city of Isfahan, Iran, on Saturday night. Iranian state media said damage to the site was “minor,” but phone footage suggests that the compound – used to produce advanced weapons and home to its Nuclear Fuel Research and Production Center – took a serious blow. An oil refinery in the country's northwest also broke out in flames on Saturday, though the cause remains unknown. Then, on Sunday night, a weapons convoy traveling from Syria to Iraq was also targeted by airstrikes. US reports attributed the Isfahan attack to Israel – which has in the past targeted nuclear sites in Natanz and hit Iranian convoys transporting weapons to Hezbollah in Lebanon. Indeed, this comes after Russia purchased hundreds of Iranian-made “suicide drones,” which it has used to pummel Ukrainian cities. While the deepening military alliance between Iran and Russia is a growing concern for Washington, it’s unclear if Uncle Sam played a role in the Isfahan hit – or whether Israel, which has to date refused to deliver heavy arms to Kyiv, agreed to carry out this attack in part to frustrate Iranian drone deliveries to the Russians. The escalation comes just days after CIA Director William Burns flew to Israel for meetings with his Israeli counterparts – and as US Secretary of State Antony Blinken heads to Israel and the West Bank this week. Crucially, it highlights the increasing overlap between Russia’s aggression in Ukraine and the longtime shadow war between Iran and Israel.
The battle for Bakhmut
Days after securing commitments from Germany and the US for advanced battle tanks, Kyiv says it’s engaged in “fast-track” talks with its Western counterparts for long-range missiles and military aircraft to provide cover for tanks in action. This comes after a weekend of heavy fighting outside Bakhmut, a flashpoint in eastern Ukraine and a critical supply route for the Russian military. However, German Chancellor Olaf Scholz does not seem to be on board with these arms deliveries – at least for now. Ukraine, for its part, has been targeting train lines around Bakhmut, specifically in villages that are well-positioned to act as hubs for Russia to bring reinforcements into southern Ukraine. Meanwhile, as the Russians pummeled the village of Kostyantnivka on Saturday, Ukraine reportedly hit a hospital in occupied Luhansk, saying it was being used as Russian military headquarters. As heavy fighting continues – and Russia reportedly prepares to call up more troops – Kyiv says it’s having increasing difficulty fending off Russian advances.
Czechs choose "calm"
In a second-round run-off, the Czech Republic elected retired general Petr Pavel as its new president. The pro-Europe, former NATO four-star officer beat populist Andrej Babis, a former PM, reaping 58.32% of the vote compared to his opponent's 42%. Three of the candidates who dropped out after the first-round backed Pavel in a contest marred by threats and disinformation – and cast as a fight between Pavel’s pro-Europe multilateralism and Babis’ populism, which resonated largely with rural voters. Pavel, a former chief of general staff of the Czech military, who vowed to "lead with experience and calm" wants to continue aiding Ukraine in lockstep with the West. Babis, who would have likely adopted many of the same policies as current populist President Milos Zeman, recently said he would not honor NATO’s mutual defense clause, but later walked that back. Even though the role of the president is largely ceremonial, the office still carries weight, including being responsible for choosing the prime minister and the central bank chief. Indeed, Pavel’s win reiterates the country’s pro-Western leanings and will be music to the ears of bureaucrats in Brussels.
Can Biden and McCarthy solve the debt limit crisis?
Newly confirmed House Speaker Kevin McCarthy said on Sunday that he will meet President Joe Biden at the White House on Wednesday to try and chart a path on raising the debt ceiling to avoid default. (For context on what the debt ceiling is and why it matters, see this GZERO explainer.) Interestingly, McCarthy said that cuts to Medicare and Social Security – which some fiscal hawks in his party had been pushing for – were “off the table.” Indeed, it’s a good sign that the two are set to meet face-to-face to try and solve a looming catastrophe, but they are still miles apart in finding common ground. Biden, for his part, says he won’t negotiate and that the Republican-controlled House needs to raise the debt limit without preconditions in order to avoid an economic crisis. But McCarthy – who is being held hostage by the far-right faction of his party that nearly torpedoed his speakership bid – can’t make many concessions on increasing the federal government’s borrowing capacity without putting himself at risk of being booted out by his own caucus. While neither side has much political wiggle room, emergency measures put in place by the US Treasury to avoid default will expire in June.
Demonstrators call for US President Joe Biden to cancel all student loan debt in Washington, DC.
Biden forgives (some) US student loan debt
The White House on Wednesday unveiled President Biden’s long-awaited plan to tackle soaring student debt in America, which currently sits at a whopping $1.6 trillion.
What’s in the package? In a one-time deal, the government will cancel $10,000 in federal student loan debt for borrowers making less than $125,000 annually or couples with a joint income under $250,000. Recipients of Pell Grants for low-income undergrads are eligible for an extra $10,000 write-off.
The Biden administration also extended for the last time a pandemic-era pause on payments, which was going to expire on Aug. 31, until the end of 2022. It also wants to cap monthly payments at 5% of earnings. That would cover unpaid interest for Americans who'd owe zero because their income is too low, so their loan balances won’t grow.
Who’ll get the relief? All former students who borrowed money from the government under its higher education financial aid program for college, and current ones who took out a loan before July 1st of this year. With a stroke of his pen, the White House estimates that Biden will wipe out the student debt of some 20 million eligible Americans, almost one-third of the total.
The assistance applies to neither private loans, which account for the lion’s share of accusations of predatory lending, nor to already paid debts, even if they were federal loans.
Who's happy? Students who’ll benefit, obviously. That explains why more than a million Americans are now googling “student loans” and searching online for how to apply for debt relief.
Most progressives within the Democratic Party are thrilled, although some senators want Biden to go even bigger and cancel $50,000 per borrower with no income cap. Biden hopes it’ll energize young voters deep in student loan debt ahead of the November midterms, with Dems’ chances looking better than a couple of months ago.
Who’s not so happy? Most economists. Clinton and Obama administration veteran Larry Summers warns that debt forgiveness will further drive up inflation by giving some Americans extra cash to spend when prices are already high.
Who blew a gasket? Many students and their parents who saved money to pay their debt. But mostly the GOP.
"Republicans see the chance to point out that taxpayers are subsidizing the borrowing of college-educated Americans, who tend to have higher lifetime incomes and the most job opportunities," Jon Lieber, US managing director at Eurasia Group, says in this week's US Politics in 60 Seconds.
Sergio Massa attends an event after the 2021 midterm elections in Buenos Aires.
What We’re Watching: Argentina’s super minister, China-Zambia debt deal, Ukrainian grain trader dead
Can a "super minister" save Argentina?
Argentina's embattled President Alberto Fernández has appointed Sergio Massa, the influential leader of the lower house of parliament, to head a new "super ministry" that Fernández hopes will help steer the country out of a deep economic crisis. Massa, Argentina's third economic minister in less than a month, will oversee economic, manufacturing, and agricultural policy. He has his work cut out for him owing to soaring inflation, farmers demanding tax relief, and a recent run on the peso. Massa also needs to convince the IMF that Argentina will comply with the terms of its $44 billion debt restructuring deal. There's a political angle too: he's (arguably) the strongest candidate the left-wing Peronista coalition has to run for president next year if the unpopular Fernández drops his bid for a second term. Massa is one of very few politicians who can navigate the ongoing rift between the president and his powerful VP, Cristina Fernández de Kirchner. If the new "super minister" does a good job, he'll be in pole position for a 2023 presidential run; if he fails, the ruling Peronistas will face long odds to stay in power.
China gives Zambia debt relief, paving way for others
Zambia's creditors, led by China, will give the cash-strapped African country enough debt relief to unlock a $1.3 billion IMF loan it desperately needs to get back into the black. It's the first time that Beijing has coordinated with other governments to restructure the debt of a low-income country instead of collecting on its own. This is good news not only for Zambia but also for other nations that owe a lot to China such as Sri Lanka, which has already defaulted, and Pakistan, which could be next. Zambia, the first country to default after COVID struck, is often cited as a glaring example of China's so-called debt trap diplomacy. But President Hichilema Hakainde, elected in late 2021, has successfully leveraged the country's vast copper reserves to reassure both the IMF and China (the latter wary of the bad optics of squeezing African countries. The deal also puts pressure on private creditors to give more breathing room to heavily indebted nations grappling with high inflation and a strong US dollar. But there's a catch: private investors will have to agree to at least as much debt relief as public creditors.
The latest from Ukraine
Russia’s war in Ukraine escalated on multiple fronts over the weekend, particularly with heavy shelling in the southern city of Mykolaiv that killed businessman Oleksiy Vadatursky. The death of Vadatursky, head of one of Ukraine’s top grain exporting companies, comes just as grain shipments are set to finally resume on Monday from its Black Sea ports. Meanwhile, Ukraine claimed it killed dozens of Russian soldiers near Kherson, crucial for the Kremlin’s supply lines lines in the Donbas region. But Kyiv had to play defense as well, as President Volodymyr Zelenskyy ordered the mandatory evacuation of civilians in the eastern Donetsk province, indicating that fighting is likely to get even more intense there. Finally, Russia was forced to cancel Navy Day in Crimea after its Black Sea Fleet was attacked by a drone from inside the Russian-occupied peninsula hours after President Vladimir Putin announced a new security doctrine with global maritime ambitious and declaring America as Russia’s greatest enemy.Drivers push their three-wheelers while waiting in a line to buy petrol amid the country's economic crisis in Colombo, Sri Lanka.
Is the global debt apocalypse here?
As the world largely began shifting to the “we have to learn to live it” stage of the pandemic late last year, many economists anticipated that hard-hit low- and middle-income countries might finally catch a break.
But then Vladimir Putin’s imperialist instincts got the better of him, and Russia decided to pancake Ukraine. The war’s economic effects are reverberating worldwide, with food and fuel shortages sending already high inflation soaring. Unsurprisingly, emerging economies with shallow pockets are reeling.
The backstory. Amid the pandemic, many low-income countries took on new debt to insulate their economies from the economic pain caused by rolling lockdowns, closed borders, and business closures. But even before COVID, many countries – such as Zambia, Sri Lanka, and Ecuador – were already heavily indebted partly as a result of government mismanagement and corruption. The pandemic-induced recession caused global indebtedness to balloon to a 50-year high.
Consider two case studies – Sri Lanka and Egypt – to help unpack how things have unraveled in many low- and mid-income countries in recent months.
Though Sri Lanka has borrowed heavily – mostly from China, Japan, and India – since its brutal civil war ended in 2009, it had never defaulted on repayment, until now.
President Gotabaya Rajapaksa introduced big tax cuts in 2019 that decapitated the country’s main source of revenue. Then COVID-19 hit, decimating the country’s once-booming tourism industry and slashing remittances. As its foreign currency reserves dried up, Colombo resorted to printing more money, which further pushed prices up and the currency value down.
Long embroiled in a Chinese debt trap, Sri Lanka narrowly escaped default earlier this year thanks to a handout from Delhi, but that didn’t last: it has now suspended its external debt repayments. Food prices have soared to “unbearable levels,” fuel is in short supply, and blackouts are rife.
In Egypt’s case, the currency had been more stable in recent years largely because of strict control measures enforced by the central bank. Still, amid near economic collapse in 2016, Cairo agreed to austerity measures as part of an IMF deal. While slashing energy subsidies helped stabilize the economy somewhat, things have been pretty tough for ordinary Egyptians: living standards have plummeted, youth joblessness is rife, and nearly one third of the country’s 102 million people live in poverty.
Then came the war in Ukraine, which sent the global economy and food industry into a tailspin. Ukraine and Russia account for a third of global wheat exports, much of which has been disrupted.
“When energy prices go up, then it causes a cost burden on all sorts of businesses from fertilizer to transportation,” said World Bank President David Malpass during GZERO Media’s Global Stage Livestream on Financing the Future in Washington, DC, on Thursday. “Those are deadweight costs that can’t be recovered.”
“We need to build new supply around the world to take the place of the supply that’s being lost,” Malpass added shortly after speaking with Ukraine’s President Volodymyr Zelensky and finance ministers from 20 countries about the need to adapt and rebuild.
Consider the fallout in Egypt, where food prices – particularly bread – are central to national politics. Import-reliant Egypt buys the most wheat of any country in the world – 85% of it from Russia and Ukraine – and is thus extremely vulnerable to economic shocks in the international market.
In response to food and fuel shortages and rising inflation in recent weeks, Egypt’s central bank raised interest rates and enforced price controls on unsubsidized bread. President Abdel Fattah el-Sisi is doing everything in his power to avoid the mass protests that rocked Egypt in 2011, leading to the ouster of longtime autocrat Hosni Mubarak.
“A month ago, we were having very different discussions about the recovery and the return to tourism,” says Rania al-Mashat, Egypt’s minister of international cooperation. Speaking to GZERO from the World Bank on Thursday, al-Mashat said that though Egypt has strategic wheat stockpiles that will last until September, the government continues to work on “immediate mitigation efforts.”
But if things continue to deteriorate and Egypt needs help from international lenders, the IMF will likely demand that Cairo implement significant reforms – like dropping subsidies – to unlock cash. This sort of arrangement rarely bodes well for governments, particularly in Egypt, where about two-thirds of the population eat subsidized bread. (In 2008, amid a drought-induced food crisis, Mubarak ordered the army and police to bake bread to lower the temperature amid protests.)
Meanwhile, with mounting popular discontent – and double-digit inflation – Sri Lanka has flip-flopped in recent weeks. While Colombo was long reluctant to go to the IMF for help, it's now appealing to the fund for assistance in restructuring its $7 billion in debt and this year’s interest repayments. China, which accounts for 10% of Sri Lanka’s external debt, has notably refused a restructuring request.
The IMF says that talks with Sri Lankan officials will address “public debt that has risen to unsustainable levels, low international reserves, and persistently large financing needs in the coming years.” But with Rajapaksa facing political turmoil at home – and refusing to resign despite losing the support of his own government – it seems unlikely the IMF will offer Sri Lanka much leeway.
This comes as the IMF warns that all countries are going to experience contracted growth this year. Less growth overall will mean less foreign investment in low-income countries, whose currency values will drop and make it more expensive to pay back their debt.This is already playing out with China, which is becoming more cautious with its lending practices, particularly in Africa.
But Malpass warns against pulling back. “I’ve been advocating that advanced economies open their markets more. Recognize that this is a moment to make friends, to help people who don’t have as much, and that means looking at all your trade barriers ... and cut them back.”
Chinese Foreign Minister Wang Yi poses for a photograph with Sri Lanka's Prime Minister Mahinda Rajapaksa during their bilateral meeting in Colombo, Sri Lanka, January 9,2022.
The looming pandemic debt cliff
Right on the buzzer, Sri Lanka on Tuesday narrowly avoided its first-ever sovereign debt default. But the cash-strapped country is still on the hook for a lot more cash this year, which is shaping up to be a very painful one for low-income countries deep in the red due to COVID.
Sri Lanka is running out of money because its tourism-dependent economy was wrecked by the pandemic, and won’t bounce back until foreign visitors return in big numbers. Omicron is dashing hopes that’ll happen anytime soon.
The government is in a real fix. Two-thirds of its revenue is going to pay just the interest on its loans. Foreign exchange reserves were almost depleted before a $1.5 billion currency swap with China. Food prices are soaring. The value of the local currency has plummeted.
Sri Lanka recently even resorted to bartering to settle a $251 million loan from Iran with monthly shipments of tea.
Partly to blame is China, to which Sri Lanka owes an estimated $3.5 billion. Beijing is the country’s top creditor, accounting for 10 percent of the country’s debt. The Chinese are traditionally tough on restructuring — and always include onerous terms in the fine print in case they get stiffed.
The Sri Lankans found out about this the hard way. The country is often cited as a case study in the perils of China’s debt trap: in 2017 it was forced to give a Chinese state company a 99-year lease to operate a strategic port as collateral for defaulting on a $1.1 billion loan. Other countries like Djibouti, Laos, Zambia, and Kyrgyzstan — all of which owe China more than 20 percent of their GDP — are in a similar predicament, with little leverage and much sovereignty to lose.
But pro-China President Gotabaya Rajapaksa would rather ask Beijing for more money than the IMF for a bailout. The president and his brother, PM Mahinda Rajakapsa, say Chinese loans have been essential to rebuild Sri Lanka's infrastructure after 25 years of civil war. The duo swept back to power in 2019-2020 in no small part due to their promises to invest China's money in airports and roads to boost tourism.
This time, however, Sri Lanka avoided defaulting thanks to an eleventh-hour lifeline from India, China’s regional rival and eager to counter Beijing’s financial muscle in its own backyard. Still, borrowing from Peter to pay Paul is hardly a long-term solution to the country’s current debt crisis because most of that debt is in bonds held by international creditors who don’t play politics.
What’s more, Sri Lanka is not the only low-income country with big debt problems from COVID. The World Bank estimates that many of the world's poorest countries face an almost $11 billion surge in debt repayments in 2022 from the previous year.
Most of them were already highly indebted before the pandemic, and had to borrow even more (from China, international financial institutions, or capital markets) to weather COVID-induced economic crises. Even for those countries who signed up to a joint IMF/G20 plan to defer payments on their pre-pandemic loans, the extended grace period expires in December — when there will still be much uncertainty over their ability to repay all that accumulated debt.
While the vast majority of advanced industrial economies have almost reached pre-pandemic levels of growth today, the rest of the world is lagging behind. For low-income countries, sluggish economic growth means governments can't raise enough revenue from taxes to pay their debt. The longer their economies suffer, the harder it'll get for them to settle their bills — and the wider the gap with rich nations will grow.
Meanwhile, Sri Lanka is looking down the barrel of a gun if it doesn’t restructure its debt soon.
Printing money is out of the question because that would make already-high inflation skyrocket. Sri Lankan economists are asking the government to temporarily suspend payments, and use its scarce cash reserves to buy food, fuel, and medicine.
But the unintended consequences of a default could be far worse. It could trigger a bigger crisis by cutting off Sri Lanka from the international financial system. When foreign credit dries up, it’ll just be a matter of time before there’s a run on banks, and social unrest follows.
The Graphic Truth: Deep in the red with China
The pandemic has thrown many already-indebted countries further into the red. The problem is two-pronged for many Asian, African, and Latin American countries. They have taken on huge amounts of debt from the IMF to weather pandemic-related economic uncertainty, while also being caught up in a debt trap set by China, which funds large infrastructure projects in developing states but often with complex or misleading fine print. We take a look at which countries out of a group of 24 surveyed states owe China the most compared to their respective IMF debts.
Stopping the debt spiral in the world's poorest nations
"There needs to be a dramatic and deep reduction in the amount of debt on the poorest countries. That's clear." As the world's poorest nations struggle to recover from a devastating pandemic, World Bank President David Malpass argues that freeing them of much of their debt will be key. His conversation with Ian Bremmer is part of the latest episode of GZERO World.