Commentary by José Siaba Serrate, TF9 Co-Chair. Originally published on ISPI’s website

Multilateralism was in crisis well before the Covid-19 pandemic brought the global economy to its knees. And not even the Great Depression (1929-1932) created the incredibly deep, instant mess the world suffered in QII 2020 as all of a sudden, lockdown became the top public health policy. Was the pandemic a black swan? Not at all. It was a statistically remote but foreseeable event. Actually, in 2004, the World Health Organization (WHO) stated that the world was ill-prepared for an inevitable flu pandemic. Sixteen years later, the now heavily criticized institution proved to be right on both counts. What failed us? We had the vision, but no proper action. Sound familiar? What about climate change? We know that we have ten years left to stop global warming from becoming a catastrophe. And we still lack action.

What can we say about the G20, semi-immobilized by the revolt against multilateralism since US President Donald Trump took office in the US in early 2017? One pretty good thing: the Covid-19 pandemic created no financial crisis. Its finance track weathered the shock and stayed steady on track. The virus destroyed lives and jobs but against all the odds, credit was resilient. Why was that? After the painful Lehman Brothers experience – its collapse in September 2008 and its shivering aftershocks – the Financial Stability Board (FSB), under the umbrella of the G20, not only had a vision but developed an action plan. After all, dealing with international financial crises was the task that originated the G20 in 1999. Basel 3 and macroprudential regulation, put in place before the pandemic, were very efficient shock absorbers. Investing ex-ante in strengthening resilience (through extra capital and liquidity layers) paid off. For the first time in several crises, banks (and financial markets) could increase lending counter the cycle and – with the timely intervention of aggressive national monetary and fiscal policy – help stabilize investors’ confidence and the real economy rather quickly.

Should we praise collaboration within the G20 nations during turmoil, at least in the financial arena? Cooperation was not particularly impressive and seemed less than back then in the Lehman crisis. Rapidly established Central Bank currency swap lines were effective – avoiding dollar shortages almost totally, despite utilization was lower than in 2008/2009 – but their geographic coverage remained limited. In 2009, a $250 billion general allocation of Special Drawing Rights (SDRs) increased liquidity available to all IMF members; this time, the US vetoed similar proposals. And what about coordination? Acknowledgment in this area is due to the pandemic more than to any other multilateral institution, the G20 included. Expansionary national economic policies responses were de facto harmonized by the huge symmetric synchronized shock the world suffered. Spillovers were strong as financial markets worked without disruption and provided a well-lubricated voluntary safety net (that nobody expected) where emerging market economies benefitted by having ample access to new indebtedness at moderate interest rates.

No financial panic erupted. The very much feared Covid-19 debt bomb did not explode. Nonetheless, Argentina and Ecuador had to refinance their sovereign debt (placed with private bondholders), what they did smoothly during the pandemic. Enhanced collective action clauses, another recent addition to the international financial framework, facilitated both restructurings without significant trauma nor default (and leaving less than 1% of holdouts).

So what is left to be done? If the pandemic were just a single shock, rebalancing policies, progressively back to normal, and limiting debt growth to regain policy space would be the next financial task. But the global infection seems to come in successive waves, a vaccine or a successful medical treatment are still on the horizon, and the adverse economic effects are far from over (and accumulate). Under such conditions, living together with the enduring Covid-19 requires further action and puts pressure on the G20 to deliver much more.

There is urgency in dealing with debt fragilities.

After avoiding a liquidity crisis, for the weaker credits, solvency may be their next problem chapter. The risk of sovereign debt stress within two years has more than doubled – from an average probability of 11% to 24% – according to the IMF forecasting models. Lacking a formal sovereign debt resolution mechanism, the way to prepare comprises strengthening contractual provisions, improving debt transparency, and getting all (private and official) stakeholders involved in the restructuring process, even preemptively, if drastic action is required. China is the leading official bilateral creditor, yet it is not a member of the Paris Club nor follows its procedures. Adopting a common framework for G20 members is a desirable goal. In parallel, the Debt Service Suspension Initiative (DSSI) – that reached 43 of the poorest countries in the world – should be extended throughout next year. And debt relief is to be considered for the weakest cases.

Preserving recovery and encouraging inclusive and resilient growth is crucial for handling the crisis´s legacy (including excessive debt burdens) and setting the stage for a robust post-Covid economic and financial landscape. Mainstreaming sustainable finance is a leading challenge ahead. But it is imperative to define a comprehensive sustainability agenda first, with clear goals, policies, and incentives. Transformative action led by the G20 is urgent as the clock is already ticking.