We have updated our Privacy Policy and Terms of Use for Eurasia Group and its affiliates, including GZERO Media, to clarify the types of data we collect, how we collect it, how we use data and with whom we share data. By using our website you consent to our Terms and Conditions and Privacy Policy, including the transfer of your personal data to the United States from your country of residence, and our use of cookies described in our Cookie Policy.
{{ subpage.title }}
The U.S. House Committee on Rules holds a hearing about the United States' debt ceiling.
House passes debt limit bill
The US House of Representatives on Wednesday night passed a bipartisan debt limit bill to avoid a government default. And after all the drama, it wasn’t even that close: 314 lawmakers voted in favor of the bill, while 117 opposed it. Interestingly, more Dems (165) backed the measure negotiated by House Speaker Kevin McCarthy with the White House than Republicans (149).
It’ll now go to the Senate for a vote before Monday, when the US Treasury has warned that the government will run out of money to pay back its debt.
To be sure, many lawmakers – on both the right and left – didn’t get what they wanted. But while some progressive Dems spoke out against the bill’s provisions that they say benefit the wealthy and ramp up work requirements for recipients of food aid, they stopped short of criticizing the Biden administration, instead placing blame for the bill’s shortcomings squarely on the GOP.
Republicans, however, have been at loggerheads in recent days, with members of the far-right Freedom Caucus panning McCarthy for giving too much to the Dems, and at least one calling for his ousting. Indeed, it was a blow for the House speaker that he didn’t even have enough votes from within his own caucus to pass a procedural step earlier in the day needed to advance the bill. He had to rely on Dem votes to push it forward.
So what now? Markets will likely respond well to the news. But anti-McCarthy Republicans are seething and have warned of a “reckoning to come.”
Staving off default: How unsustainable debt is threatening human progress
Three-fifths of the world's lowest income countries are debt distressed and in danger of default. Navid Hanif, assistant secretary-general for economic development at the United Nations, tells GZERO's Tony Maciulis that we need to make debt more sustainable by restructuring it. Hanif believes multilateral development banks, such as the World Bank, should offer affordable longer-term loans with lower interest rates to allow least developed countries better opportunities to deal with crises like climate change, poverty, and educating children.
During a conversation at the World Bank/IMF spring meetings in Washington, DC, Hanif explains how a financial divide will eventually become a development divide, which is not good for the world. He explains the urgency of the growing debt problem.
However, Hanif also expresses optimism about the potential for progress coming after years of the pandemic, citing the growth in people gaining access to the internet and a renewed commitment to climate goals.
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.A brass plaque of the State Bank of Pakistan in Karachi.
Even if Pakistan defaults, its larger challenges remain
Pakistan is facing default on its sovereign debt.
After Sri Lanka, it’s the latest emerging economy to falter in the wake of COVID, the war in Ukraine, and skyrocketing inflation. But the stakes are higher: Pakistan borders China, India, Iran, and Afghanistan, and it sits at the crossroads of the Persian Gulf and the Indian Ocean. It’s embroiled in a battle against rising terrorism, and it has nuclear weapons.
But the world’s fifth-most populous country — where 220 million live under a political system plagued by corruption and extremism ± isn’t just broke. Polarized and isolated, it’s going through a period of instability not seen since its civil war in 1971, when it lost a majority of its population as East Pakistan seceded to become Bangladesh.
A serious rethink is needed about the way Pakistan manages itself and its diplomacy. So, are its rulers making the right adjustments?
Debt and doubt are mounting. The Pakistani rupee lost 8.3% of its value last week — an all-time low. Its stocks are the worst performing in Asia, and it has less than two months' worth of foreign exchange reserves, which means Pakistan needs an IMF bailout immediately.
But the country has a habit of not mending its ways: Pakistan is one of the most bailed-out countries on the IMF’s books, having received 22 loans since 1958. It borrows, refuses to reform, then borrows again. Now, the IMF wants more than Pakistan’s empty promises and is seeking assurances from a guarantor like Saudi Arabia before offering another lifeline.
Political turmoil has paralyzed governance. The military remains all-powerful but is threatened by recently ousted Prime Minister Imran Khan. Once an ally of the generals, Khan lost their support this spring and paid for it with a no-confidence vote that saw him replaced by a military-backed coalition of older political dynasties, the Sharifs and Bhuttos. But high prices, power cuts, and removal of public subsidies have quickly eroded support for the new government.
Despite his own track record of maladministration, Khan is gaining the sympathy of the street, turning protests into votes, bashing his former benefactors, and threatening further unrest.
Security and geopolitical problems are also escalating. After backing the Taliban for two decades while pretending to be America’s ally, Pakistan’s gotten more than it bargained for. It’s suffering attacks from terrorists based in Afghanistan, and its relationship with Washington has deteriorated. American diplomatic interest and financial investments have all but dried up. This has pushed Pakistan to embrace China and its expensive loans tied to Beijing’s Belt and Road Initiative.
But as China tries to make inroads, its personnel and projects have been targeted by insurgents, forcing Beijing to go slow on investments there.
Meanwhile, Pakistan’s poisonous relationship with India has only worsened. Narendra Modi’s Hindu-nationalist regime has tightened its grip in Delhi while anti-India generals continue to dominate Islamabad’s foreign policy. Despite a back channel, the two sides barely trade or talk, and instead support proxy militants on each other’s turf. Moreover, Islamabad has seen relations chill with once-friendly neighbors like Saudi Arabia, the UAE, and Iran, all of whom now have warmer ties with New Delhi because of India’s increasing economic clout.
If the most immediate threat is default, can Pakistan avoid it? Even though the rupee saw its biggest drop last week since 1998, its central bank thinks it can meet its obligations for yet another IMF bailout. Others are not so sure.
“Pakistan is significantly closer to default today than it was a few days ago,” says Uzair Younus, director of the Pakistan Initiative at Washington’s Atlantic Council. “Does this mean default is imminent? No, but domestic elites are signaling that they are bracing for impact and a hard landing.”
Crucially, the political will to improve the situation seems to be lacking. “There’s little incentive for politicians to cooperate and bring Pakistan back from the brink,” Younus says about the leadership, which is dominated by exploitative landed and industrial classes who maintain their assets abroad.
This was evident on Friday, when the election of the chief ministership of Punjab, the country's largest province, didn’t go to Imran Khan’s candidate despite being poised for a majority. Rather, backroom politicking robbed Khan and his allies of their prize, resulting in protests. With such political wrangling and brinkmanship, there is only one disciplinarian: the Pakistan military.
“The chaos may once more open the door for enhanced involvement of the military in stabilizing the political economy,” says Younus.
Pakistanis aren’t unfamiliar with military interventionism in their daily lives. The world’s sixth-largest military has ruled Pakistan directly or indirectly for most of the last 75 years since independence.
If the military leans in, it could lead to one of two types of scenarios: direct rule, which the army has exercised intermittently for over three decades; or indirect rule, which means the brass appoint an apolitical and technocratic government, a model the generals have also toyed with in the past.
While admitting that Pakistan’s economic and political situation is becoming untenable, senior security officials, speaking on condition of anonymity, denied that direct rule is in the cards. But a former Pakistani diplomat said he got a “heads-up to stand by in case of a technocratic set-up by the ‘Establishment’.” That’s Pakistan-speak for the army and its praetorian intelligence apparatus.
Even if autocrats take over or bring in technocrats from Pakistan’s diaspora to run things, certain realities will be hard to change. India, not Pakistan, is Washington’s new best friend in South Asia. And while India has graduated to a $3.3 trillion economy, overtaking the UK as the world’s fifth-largest, Pakistan’s over-investment in remaining a national security state has only unraveled its potential.
Aid packages and military interventions can’t fix that. Pakistan has retained a military it can’t afford and backed proxies it can’t control while allowing its financial and administrative institutions to falter. With an anemic tax regime, stagnant industrialization, a shrinking middle class, the biggest gender income gap in South Asia, and a falling education rate (with nearly half of 5-16-year-olds unenrolled in school), Pakistan needs more than multilateral institutions and donors to come to its aid. It needs economic reforms and a security rethink.
No friend or ally has been able to convince the country to mend its ways. But of all its partners – and there aren’t many – China is the most likely to pick up the tab. Beijing has long seen Islamabad as a bulwark against their common rival, India, but the economic and diplomatic costs of supporting Pakistan, its “Iron Brother,” are mounting. The $65 billion China-Pakistan Economic Corridor, for example, is struggling because of Pakistan’s inability to deliver.
“CPEC was the crown jewel of Xi Jinping’s Belt and Road Initiative and the downward spiral of Pakistan, weighed down after binging on Chinese debt, will undermine China's economic diplomacy,” says Younus.
Given its size, location, and its nukes, many Pakistani leaders have often scoffed at the notion of collapse or default, insisting the country is too big to fail. That’s one reason why the country has failed to develop a sounder economic system, relying instead on bailouts.
But Pakistan’s weakness isn’t just financial; it’s also existential. With such divisive politics, it can’t afford another military or technocratic regime. Considering the rough neighborhood it resides in, becoming a Chinese dependent is also dangerous. Critically, with failures on so many fronts — economics, war, democracy, human rights — Pakistan is running out of time to correct its course.Zelensky addresses MPs in the British Parliament's House of Commons.
Zelensky takes center stage
On Wednesday, we’re tracking two developments that could shift the Russia-Ukraine story.
First, from Kyiv, Ukraine’s President Volodymyr Zelensky addressed a joint session of Congress on Wednesday. In his short address, Zelensky played to Americans’ sense of nationalism, history, and emotion, referencing the leaders atop Mount Rushmore as well as Martin Luther King’s “I Have a Dream” speech. “I have a dream. These words are known to each of you,” Zelensky said. “Today, I can say I have a need. I need to protect the sky.”
Zelensky again called for the US and NATO to impose a no-fly zone over Ukraine, and he also asked Congress to push for new sanctions each week to help starve the Russian war machine. His plea reportedly moved members of Congress to tears.
Last week, Congress approved nearly $14 billion to go to Ukraine, and the Biden administration is set to release $800 million on top of the $350 million in military aid they quickly sent when war broke out.
So what more can the US do? “The American people want Biden to do more,” says Jon Lieber, Eurasia Group’s lead US political analyst. “But Biden is running into the political and practical limits of what he can do.” He’s already sanctioned the Russian economy “back to the 1990s,” and the war has led to dozens of US-based businesses pulling out of Russia.
There are two things Biden has clearly stated he will not do: facilitate the transfer of Soviet-era jets from Poland to Ukraine and impose a no-fly zone, which Biden said would risk a direct military clash with Russia. In short, he’s not risking World War III.
As for a no-fly zone? “The American people agree with the president,” says Lieber, referencing a new poll showing that only 23% of Americans support the idea of imposing a no-fly zone over Ukraine (when defined as meaning that Russian planes could be shot down).
Biden’s critics have said he is letting Putin dictate the terms of US engagement in Ukraine, with Sen. Lindsay Graham accusing him of “folding like a cheap suit” over the Polish planes once they figured out that Putin would see any additional steps as an escalation.
But the US is in a bind, says Lieber. “They want to help Ukraine but are afraid of Putin, who continues to press the war in the face of near-universal international condemnation."
Second, Russia has a payment due Wednesday of $117 million in interest on two sovereign Eurobonds.
There are three more payments due this month. If the debt isn’t paid, this will mark the first sovereign default on foreign currency debt since the Bolshevik Revolution more than a century ago. (It defaulted on domestic debt in 1998.) Sanctions, which block Russian access to dollars and euros, will probably leave Russia unable to pay on Wednesday. The economic impact could last for years as Russian borrowing costs climb higher, and many of Russia’s heavily indebted largest companies are later forced into bankruptcy.
- Zelensky plea for additional Ukraine support puts US in a bind - GZERO Media ›
- Zelensky knows how to talk to the West - GZERO Media ›
- Volodymr Zelensky: TIME's 2022 Person of the Year - GZERO Media ›
- Volodymr Zelensky: TIME's 2022 Person of the Year - GZERO Media ›
- Zelensky's welcome in the West reinforces message of unity - GZERO Media ›
China Evergrande Group logo displayed on a phone screen and Chinese flag displayed in the background are seen in this illustration photo.
Can Xi save China from Evergrande?
Evergrande, China's second-largest property developer, got on Monday its best news in months: someone's willing to buy part of its hugely indebted real estate empire, probably for fen on the yuan. But the company's still in deep trouble: it owes a whopping $305 billion — about 2 percent of China's GDP.
Chinese authorities have spent weeks bracing for Evergrande's looming default like for a slow-moving train collision. With 1,300 projects across 280 cities across China, Evergrande — a gargantuan corporation that also runs theme parks, makes electric vehicles, and owns a soccer team — is a heavyweight in China's once-booming real estate industry, which has driven much of the country's economic growth over the past decade by relying on heavy borrowing.
If Evergrande fails on its debt obligations, the ripple effects could be catastrophic. Although the Chinese government would likely protect the 1.4 million mostly middle-class Chinese families who invested their life savings to become homeowners, countless big and small suppliers that are owed a lot of cash could go belly-up, and up to four million jobs are on the line.
But the real danger is the fallout spreading to the wider residential property sector — which represents almost 30 percent of China's GDP and of outstanding Chinese loans — and from there to the financial sector. If Chinese banks get stiffed by their real estate creditors, they'll have a lot less capital to lend, and the cost of borrowing could go up for everyone.
Severe financial upheaval — similar to what happened in the US following the 2008 collapse of investment bank Lehman Brothers — would then erode confidence in China both at home and abroad little over a year before Xi Jinping is expected to confirm he'll stay on as president for 15 years, unprecedented for Chinese leaders in the post-Mao era.
Xi needs to do something, fast. But he faces a very tough balancing act.
On the one hand, he could let Evergrande default to teach the company and the entire real estate industry a lesson on irresponsible borrowing, one of the many symptoms of the no-holds-barred capitalism Xi has long rallied against. In fact, the full extent of Evergrande's debt hole only came to light eight months ago, when Beijing tightened the rules on real estate borrowing in one of the opening salvos of Xi's later wider crackdown on big tech companies and other sectors that the ruling Communist Party thinks are putting profits ahead of what Xi refers to as "common prosperity."
The problem is that Evergrande's collapse could usher in a nightmare scenario for Xi and the CCP: massive social unrest stemming from a situation in which developers who have presold residential property can't afford to build it, leaving buyers without a home nor savings, and starving local governments of the land and property tax revenues they need to keep the keep the lights on. Add a credit crunch, and you're looking at an economic slowdown the likes of which China hasn't seen since the late 1970s.
To put it simply, tough love for Evergrande could come at a very high cost for the CCP.
On the other hand, Xi could also bite the bullet by bailing out Evergrande because it's just too big to fail, to avoid sector-wide contagion, and to restore confidence. Yet, in doing so he'd be undermining his own political agenda of reducing the systemic risk within the property sector, not to mention setting a bad example for other big Chinese corporations deep in the red.
So perhaps the safest bet is a "managed" collapse, which some Chinese netizens have likened to the controlled demolition of a building. Let Evergrande crumble, but slowly, and closely stage-manage the process by "encouraging" state-owned firms to buy up the company's assets piece by piece so Evergrande can repay its debts and finish the projects it's already presold to homebuyers.
But that'll be tricky, too. Evergrande also owes a lot to foreign investors, so Xi faces yet another dilemma: risk domestic backlash by making them square first to keep overseas cash flowing to China, or prioritize paying off Chinese debt — which could spook foreign investors, at least temporarily (the world's second-largest economy is too big a prize for them to stay away very long).
Whatever Xi does, there's no easy fix. A messy default could put China's entire economic growth model into question. However, if Xi's able to stop Evergrande's debt crisis from infecting the rest of China's financial system without a bailout, he will have pulled off what mighty America failed to do in 2008 — prevent the collapse of its housing market from turning into a global recession.