New Data on the “Debt Trap” Question
By Agatha Kratz, Associate Director, Rhodium Group
Allen Feng, Senior Analyst, China Markets Research Team, Rhodium Group
Logan Wright, Director, Rhodium Group
A new study published by the Rhodium Group brings to light new data on the question of the “debt trap”. Here are the researchers’ three main findings:
Debt renegotiations and distress among borrowing countries are common. The sheer volume of debt renegotiations points to legitimate concerns about the sustainability of China’s outbound lending. More cases of distress are likely in a few years as many Chinese projects were launched from 2013 to 2016, along with the loans to finance them.
Asset seizures are a rare occurrence. Debt renegotiations usually involve a more balanced outcome between lender and borrower, ranging from extensions of loan terms and repayment deadlines to explicit refinancing, or partial or even total debt forgiveness (the most common outcome).
Despite its economic weight, China’s leverage in negotiations is limited. Many of the cases reviewed involved an outcome in the favor of the borrower, and especially so when host countries had access to alternative financing sources or relied on an external event (such as a change in leadership) to demand different terms.
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