Managing the sovereign debt of developing countries
Prior to the COVID-19 crisis, several low-income countries and some emerging economies were already facing sovereign debt issues, but this issue has become increasingly serious with the current crisis, limiting the ability of these nations to manage the economic and social effects of the crisis. pandemic.
This question was asked by the Managing Director of the International Monetary Fund at the center of its reflections at the meeting of the Bretton Woods Institutions in October, and was followed by a call to action from a group of former finance ministers and central bank governors of emerging and developing countries. (I am part of this group.)
As in many monetary and financial fields, multilateral cooperation on sovereign debt was very limited in 2020. There have been very partial measures in favor of low-income countries but none for middle-income countries.
The IMF determined in early 2020 that 29 of its most vulnerable members will be exempt from amortization and interest on their debts to the organization, for an initial period of six months which was then extended to 24 months (until April 13, 2022).
In turn, the G-20 proposed a suspension of the debt service of the countries of the International Development Association (IDA) for the year 2020. This initiative of suspension of the service of the debt (DSSI) has potentially benefited to 73 countries, but did not cancel the debt, which also continued to earn interest. The corresponding decision was adopted by the Paris Club and other major creditors, notably China. However, private creditors have not adopted it, as demanded by the G-20, and some debtor countries have not used it for fear that their sovereign ratings will be negatively affected.
The program was extended by the G-20 in November 2021 until mid-2021, and the need for private sector involvement was re-emphasized. More importantly, they accepted the possibility of renegotiating the debt “on a case-by-case basis”. Although limited in several respects, as some analysts have pointed out, three countries have already requested to be included in the restructuring program: Chad, Ethiopia and Zambia.
As indicated, precisely because of the growing problems faced by low-income countries but also by several middle-income countries, the need for an improvement in the sovereign debt architecture has received particular attention from the IMF’s share in October 2020. The establishment’s proposals underlined the need to improve the existing institutional mechanism – the so-called “contractual” mechanism based on collective action clauses included in bond contracts – which was redesigned in 2014, and at the same time underlining the growing problems associated with non-obligations and guaranteed debts and the lack of transparency in this area.
It should be noted that the other possibility that has been on the table for the past two decades is the creation of a new institution that would support sovereign debt renegotiations. An additional possibility is to do so within the framework of the IMF, as was attempted at the turn of the century, if the debt panel in charge is independent of the institution’s board of directors. The need for such a reform, qualified as “statutory” in the debates, was again defended by the United Nations Conference on Trade and Development (UNCTAD) during the current crisis. This is also the option that I have defended in the past.
It should be noted that the existing contractual mechanisms were used successfully in the debt renegotiations of Argentina and Ecuador that took place in 2020 – an achievement which undoubtedly depended on the implicit support of the IMF to these processes. . However, these instruments cannot be used in many cases because around half of the sovereign debt of emerging and developing countries does not have such clauses. The renegotiation of this contractual mechanism or a statutory reform would take too long and would therefore not respond to the urgency of managing the debt problems in which several countries are plunged.
The situation of emerging economies and certain low-income countries is of course heterogeneous, since several countries have had access to the international private bond market since mid-April, and generally on favorable terms. For these countries, debt restructuring is not the problem, but they need additional multilateral financing, both to facilitate more aggressive economic and social programs to overcome the crisis and to avoid having financial problems. indebtedness. But for a growing group of countries, debt restructuring is essential.
The solution under current conditions must therefore consist of two elements: an increased flow of liquidity and flexible multilateral financing, and a (temporary) cyclical mechanism that would facilitate debt renegotiations.
For the first of these issues, a major Special Drawing Rights (SDR) issue would be part of the solution, along with the extension of IMF emergency lines that were actively used in 2020. And to the extent that, as one notes Brooking paper, the problem of many middle-income economies is more a problem of illiquidity than of insolvency, it should be supplemented by abundant financing from multilateral banks with low interest rates and long maturities, or even by a specific financing mechanism emergency, such as FACE Fund proposed by the President of Costa Rica to the United Nations General Assembly in 2020 (500 billion dollars transited by multilateral banks offering 50-year loans and at zero or very low interest rates).
In terms of debt restructuring, cyclical mechanisms can play an important role, as evidenced by the launch of Brady bonds to overcome the Latin American debt crisis (the main shortcoming of which is that they came too late) or the debt relief mechanisms for poor countries adopted at the turn of the century (the Heavily Indebted Poor Countries Initiative, HIPC, and the Multilateral Debt Relief Initiative, MDRI). It might be best to create a credit facility with the World Bank or regional development banks to which countries in need of debt restructuring would turn voluntarily, which would make it easier to freeze and postpone debt payments.as some analysts have suggested in 2020—Or open restructuring. It would apply to all bilateral and trade debts on equal terms. In addition to its voluntary nature, it would be subject to intermediation and strict control by the multilateral bank, which manages a specific renegotiation. As indicated by the IMF’s proposals at the Bretton Woods meetings in October 2020, international financial institutions could offer additional credits to the countries concerned to facilitate debt restructuring agreements.
Urgent action is needed on both fronts. These are some of the central questions that the United Nations, the Bretton Woods institutions and the Group of 20 are expected to adopt in early 2021.