At Elliot Management, Jay Newman became a legend when he led their successful campaign to get Argentina to pay $2.4 billion in defaulted debt. In the process, he even oversaw the seizure of a sovereign naval vessel, with sailors on board.

He is now saying investors need to expect a debt epidemic going forward. In an op-ed in the Financial Times, he wrote, “We are on the brink of an epidemic of emerging market defaults, the scale and scope of which will rival the debt crisis of the 1980s. Rate increases by Western central banks, fallout from the COVID pandemic, surging food and fuel prices resulting from the economic fallout of the war between Russia and Ukraine, mismanagement, and outright corruption all are contributing factors.”

What Newman believes is different this time, is China’s role as lender. He believes China has laid a massive debt trap which will allow it to seize key assets across the globe. He notes, “When Sri Lanka, predictably, found itself unable to satisfy the debt, China sprang the trap, insisting on repayment, offering to exchange debt for further concessions and vast tracts of land, and offering additional cash to help tide the political class over.” 

He goes on to say international financial institutions, Western governments, “chuckleheaded” non governmental organizations and international press will demand private-sector creditors offer indebted nations like Sri Lanka concessionary terms.

But he asks, “Why do that? Unless a debtor demonstrates a willingness and capacity for reinvention, and unless all creditors — including China and the IFIs — agree to disclose the entirety of their claims and agree to negotiate a resolution on commercial terms, any restructuring will fail.”

Sri Lanka’s $35 billion worth of lenders include China, Japan, India, The Asian Development Bank, and The World Bank.

As one looks out over China’s extensive holdings of US debt and investment in mineral-rich areas of Africa, the future could become quite interesting.