World teeters on a $235trillion debt mountain – and there is no ‘magic wand’ to wipe it away, warns head of the World Bank

“I wish there was a magic wand that said abracadabra,” the new head of the World Bank said when talking about the problem of debt facing developing countries.

Ajay Banga’s comments illustrate some of the seemingly intractable issues facing the great and the good of global finance gathered in Marrakech this week.

In the plus thirty degree heat, the International Monetary Fund (IMF) and World Bank joint meetings are meant to be a place where cool heads with an eye for financial spreadsheets can find common ground.

And until a few days ago, the clear blue skies above the Moroccan city seemed to herald a sunnier outlook for the global economy.

Indeed, Treasury Secretary Janet Yellen poured in from Washington to insist that the “pessimism” that enveloped the shindig when it was held in the US a year ago was unwarranted.

Yet Yellen had to admit that events on the other side of the Mediterranean, after Gaza terrorists carried out a gruesome attack on Israeli civilians, cast a shadow – and could pose a new challenge to the global recovery by raising oil prices push.

This is not the only cloud on the horizon, with the Ukraine war still taking its toll, the fight against inflation still not won, and the prospect of interest rates staying higher for longer threatening to derail the recovery.

And while many, including Yellen, talk about the prospects of a so-called ‘soft landing’, the intended recovery is hardly triumphant, with the IMF’s forecasters seeing the global economy ‘not limping’.

That’s even before mentioning the challenges of trying to wean the world off fossil fuels in a way that’s fair to developing countries that don’t have the resources to make the change — and who in many cases will bear the brunt of climate change.

All this with the world teetering on a $235 trillion debt mountain – and relations between the US and China, the world’s two largest economies (and which itself has the largest debt), strained at a time when consensus is most needed.

The dispute extends over who provides the financing and makes the decisions at the IMF.

At the same time, the rise of China as a major lender to poorer countries has become a major headache.

A key problem is what happens when one of those lender nations struggles and has to restructure that debt, with borrowers having to agree to a so-called haircut – getting back less than they expected.

Without the various lenders being transparent with each other, some of them will be reluctant to accept such terms if they think the others do not have to suffer.

“You have to get the facts first and then you can sit down together and negotiate how to get that debt off,” Banga said.

‘I believe that this is the right way to get it done.

‘I wish there was a magic wand that said abracadabra, we’ll just wipe the debt out of the system. I don’t think that’s likely to happen.’ A meeting between Janet Yellen and China’s central bank governor Pan Gongsheng taking place in Marrakech should aim to smooth over such issues.

But the debt burden facing richer countries is also a problem.

As the IMF notes, the US and China account for 30 percent and 20 percent of global debt, respectively. They are examples, says Vitor Gaspar, director of the fund’s fiscal affairs department, of countries on an ‘unsustainable fiscal path’.

With debt already high and the cost of servicing that debt rising – while public expectations of the role of the state have risen post-pandemic, ‘something has to give to balance the fiscal equation’ – despite what he admits a ‘widespread dislike’ is to raise taxes.

It is difficult for finance ministers to talk to voters.

And that is certainly the case for British Chancellor Jeremy Hunt, in Marrakech this week for high-level meetings with ministerial counterparts and already presiding at home over a tax burden set to become the highest since the war.

Still, the IMF reckons Hunt is on track to miss his target to reduce borrowing levels.

Some of the solutions to the world’s problems are made to sound simple when discussed in the air-conditioned tents sheltering ministers and officials from the scorching heat.

Banga used a climate event to talk about the possible reduction in emissions if only rice farmers in India could be persuaded to change the way they irrigate their fields.

Other times, the level of discussion is enough to confirm the view of anyone skeptical of the ability of the world’s elite to solve problems.

“We need to move from the culture of finger-pointing to the culture of holding hands,” IMF Managing Director Kristalina Georgieva said at the same meeting, reaching out theatrically to grasp Banga’s.