Brazil is to join the Paris Club of wealthy sovereign creditors, becoming the first large developing economy to enter the group for two decades, as deteriorating global credit conditions spur governments to improve co-ordinated debt relief efforts.
Officials say the sharp rise in emerging market borrowing since the financial crisis has encouraged the group of lenders to expand its membership amid the re-emerging threat of debt crises in poorer nations. The last big emerging market to join was Russia in 1997.
Brazil’s entry to the Paris Club formalises its longstanding role as an ad hoc participant in negotiations, particularly the restructuring of African debt. It is a sizeable lender to countries such as Nigeria, Angola and Mozambique.
“Brazil is a large creditor and has an important role to play in the international community,” said Odile Renaud-Basso, head of the French Treasury and president of the Paris Club.
“This sends a signal that emerging market countries have a bigger role to play in dealing with debt problems,” she added.
Non-bank borrowers in emerging-markets have doubled their external debt in the last seven years amid an era of cheap money, accumulating $3.2 trillion according to Bank for International Settlements. The BIS has warned of a potential “vicious” deleveraging cycle to come as borrowing rates rise.
As the US economy recovers and investors migrate from emerging markets back to developed economies, cheap funding rates are evaporating, raising the cost of repaying debt and putting borrowers under strain. So far this year, 27 corporate borrowers in emerging markets have defaulted on their debt, according to S&P Global Ratings - the largest number since 2009.
Worst recession
For Brazil, the move to become a full member of the Paris Club is a statement of its financial resilience even if Latin America’s largest economy is facing its worst recession in more than 100 years, government officials say.
It is also an indication of Brazil's determination, as the world's ninth largest economy, to play a bigger role in international financial affairs following the global financial crisis. Alongside China, Russia and India, it has been instrumental in efforts to force the US and Europe to allow emerging nations to have more say in international institutions, such as the International Monetary Fund and World Bank.
Brazil is also a leading member of the so-called Brics nations, which include Russia, India, China and South Africa, helping to fund the establishment of an independent development bank for the group.
“In a way, this is part of the movement that started after the global financial crisis,” said a government official who is familiar with the Paris Club talks.
Since the Paris Club was created 60 years ago, members have restructured or written off close to $600bn of debt for 90 countries, including Myanmar, Cuba and Yugoslavia.
One of the most high-profile initiatives to date has been a debt relief programme for highly indebted poor countries (HIPC) such as Côte d’Ivoire and the Democratic Republic of Congo – a programme that Brazil participated in.
There are now concerns that the low-income countries that benefited from the programme risk sliding once again into unsustainable indebtedness. The IMF estimates global debt is more than two times the size of the global economy.
“We have had very low interest rates,” said Ms Renaud-Basso. “We need to be careful to avoid the mistakes of the past - and not get back into the cycle of increasing debt.”
- Copyright The Financial Times Limited 2016
