Some high-profile sovereign creditors are signalling a tentative
willingness to help poorer countries with debt relief during the coronavirus
pandemic - but many also caution that it won’t be as simple as it sounds.
Last week’s agreement by G20
governments to freeze as many as 77 poorer nations’ debt payments for the rest
of the year came with a warning from the head of the World Bank that private
investors shouldn’t expect a “free ride”.
All are fully aware of the problem.
Defaults are already starting and across Africa, where the World Health
Organisation is warning of up to 10 million coronavirus cases within six
months, countries are facing a combined $44 billion debt-servicing bill this
year alone.
Charity groups estimate too that a
wider group of 121 low- and middle-income governments spent more last year
servicing their external debts than on their public health systems, now at
breaking point, making the moral case for relief impossible to ignore.
“There is clearly a willingness from
(private sector)creditors to be constructive, to give some breathing room,”
said distressed debt veteran Hans Humes of Greylock Capital.
Humes was part of Heavily Indebted
Poor Country initiatives in the past, and he is now involved in an Institute of
International Finance (IIF) group aiming to coordinate the private sector’s
support effort.
“The economic contraction has been
breathtaking,” he added, not to mention the fact that countries needed to
prioritise their resources to save lives.
Beyond the goodwill and understanding
though, there are serious complications.
David Loevinger, managing director of
the Emerging Markets Group at fund manager TCW, said debt relief ultimately
amounts to a debt restructuring. Restructurings are complex and typically take
far longer than stricken countries now have.
As a result, the so-called
International Development Association (IDA) countries in focus will have to
decide whether they keep paying their bonds or stop and spend the money on
ventilators and medicines instead.
“For many IDA countries, not
servicing their debt will be the right decision and as a creditor we understand
that and are happy to work with countries,” Loevinger said during an IIF
web-panel.
“But that will be considered a
default by the credit rating agencies and that is an issue we are going to have
to deal with.”
The IIF estimates that the total
amount of external debt in the countries in the G20 Debt Service Suspension
Initiative has more than doubled since 2010 to over $750 billion. Debt now
averages more than 47% of GDP in these countries, too — a high reading
considering their stage of development.
TCW’s Loevinger cautioned that
defaults could leave countries vulnerable to attack from litigious vulture
funds. In the past there have been examples of some funds going after
governments’ assets or property.
Campaign groups have urged that the
New York and London laws that govern most sovereign debt contracts be temporarily
changed to shield governments from those risks, but even that could store up
problems.
Private investors are already
concerned that emergency International Monetary Fund loans would push up
countries’ debt levels even further. They will also get priority when it comes
to repayment in future, leaving less money to service other bonds.
Suspending traditional legal rights
would also raise questions about what happens in the next crisis, whether it be
another health epidemic or the locust plagues that have recently savaged East
Africa, the Middle East and South Asia.
Nick Eisinger, principal for fixed
income emerging markets at Vanguard, said the risk of pushing up borrowing
costs meant it was very hard for the G20 to “compel” private creditors to
participate in any debt relief.
Even the IIF, which is spearheading
efforts to coordinate private investor involvement, says any relief from the
sector will need to be voluntary and only considered for countries who formally
request it.
“At the moment, it will would be a
gesture of goodwill and not legally binding. There will also be plenty of
countries not wanting to jeopardise their Eurobond market access too,” Eisinger
said.
He estimated that it might not make a
huge amount of difference, either. Eurobond coupon repayments for the
Sub-Saharan African countries this year add up to around $2.5 billion in 2020,
rising to about $3 billion for next year, but so called principal payments only
add up to a few hundred million.
“To me, if there’s an insistence on
getting private creditors involved, it will do a lot more damage than support
as it will disrupt meaningful sources of private funding”.
Greylock’s Humes had an additional
warning that countries shouldn’t try to use it as a quick-fix for their
finances.
“Countries trying to use this as a
solution for longer-term problems is not constructive”.
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