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Student debt relief company ordered to repay and cease operations in North Dakota

BISMARCK – North Dakota Attorney General Wayne Stenehjem has ordered Student Loan Services LLC to reimburse clients in the state and to stop doing business here.

The California student debt relief company is not licensed in North Dakota, and Stenehjem says it cannot operate in the state until it is in full compliance with the law. state licenses. Debt relief companies must be licensed by the North Dakota Department of Financial Institutions and post a bond with the state.

The attorney general’s consumer protection division investigated the company after a woman who paid the company nearly $ 900 filed a complaint, saying she had not received services for several months after the start of payments. The company had taken no action to reduce its student debt, according to Stenehjem’s office.

Student Loan Services, which had contracts with 18 people in North Dakota, agreed to cancel all of those contracts and reimburse anyone who asks. The company is prohibited from soliciting new clients in the state until it complies with licensing requirements.

Student debt relief companies charge fees to help reduce or eliminate loan payments and customer debt by enrolling customers in federal student relief programs. Almost all of the services offered by these companies can be provided for free.


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Borrowing costs after debt relief

The Covid-19 pandemic is straining the public finances of many developing countries (Djankov and Panizza 2020). In response, a series of proposals and calls to action have been launched by experts and policy makers (Bolton et al. 2020a, 2020b, Bulow et al. 2020; Horn et al. 2020; Landers et al. 2020). In a short time, the international community – under the leadership of the G20 – agreed to help poor countries by proposing a suspension of debt service due in the second half of 2020. As part of the Suspension of Service Initiative debt (DSSI), participating countries can ask their bilateral lenders to defer debt service repayments for three years without affecting the net present value (NPV) of public debt. The size of the liquidity provision under the DSSI is not negligible. For all eligible countries, it stands at $ 10.2 billion and represents around one-fifth of the budget deficit due to the Covid-19 shock. However, many eligible countries have so far been reluctant or refused to participate in DSSI. It may seem like a confusing answer to what at first glance is free money in times of great need. Yet these countries fear that participation in the DSSI may signal debt sustainability issues that could trigger sovereign ratings downgrades and higher sovereign borrowing costs.1

In a recent article (Lang et al. 2020), we provide a first assessment of the short-term impact of DSSI on sovereign bond spreads. In particular, we test whether the potential benefits of providing short-term liquidity outweigh the stigma effects that may be associated with participating in the debt relief initiative. Estimating the effect of debt relief on sovereign bond spreads is generally difficult, as debt relief initiatives are generally not attributed to chance. Comparing debt relief recipients to other countries is therefore not instructive. However, the case of the DSSI makes it possible to construct plausible counterfactuals. Unlike most debt restructurings, the DSSI was announced simultaneously for the 73 eligible countries and, therefore, was not tailored to the needs of each country. In addition, the eligibility criteria were based on pre-existing income thresholds rather than financing needs or the severity of the shock, which crucially influence borrowing costs.

Sovereign borrowing costs fell by around 300 basis points

We use this event to analyze its impact on the spreads of sovereign bonds of the 16 countries eligible for DSSI with access to the international market and daily data available. We have used the Synthetic Control Method (SCM) developed by Abadie and Gardeazabal (2003) and now increasingly used in similar contexts (see Marchesi and Masi 2020). For each country eligible for DSSI, we build a synthetic control (or “doppelganger”) combining countries from a pool of middle-income countries not eligible for DSSI.2

Figure 1 shows our main result. The comparison of the spreads of the sovereign bonds of the countries eligible for the DSSI with their synthetic controls shows that the sovereign spreads decreased considerably after the debt relief. Several days after the DSSI announcement, spreads in eligible countries were down about 300 basis points (bps) more than in comparable untreated doppelganger countries. This average effect differs from country to country, but it is negative for all borrowers eligible for debt relief. This result is robust to the different specifications of the model, including the generalized synthetic control method (Xu 2017). In addition, a set of placebo tests in space and time shows that the effect on spreads is due to the DSSI and cannot be explained by the (contemporary) demand of an IMF program.

Figure 1 Spreads of sovereign bonds in DSSI-eligible countries compared to their synthetic controls

Remarks: The figure represents the difference between the real spreads of sovereign bonds and those of the synthetic control (spread gap) for the countries eligible for the DSSI. The solid red line is the average of the country specific spreads. Solid gray lines refer to countries that joined the DSSI on September 17, 2020, while dotted gray lines refer to countries that have not officially applied to join the initiative (Ghana, Honduras, Kenya, Mongolia, Nigeria and Uzbekistan). The vertical lines indicate the announcement of the DSSI on April 15, 2020 (solid line) and the first participation in the DSSI on May 1, 2020 (dotted line). The dots indicate the participation of each country in the DSSI. See description in main text. Source: Bloomberg, Our World in Data and IMF World Economic Outlook.

The fall in spreads seems to be due to the provision of liquidity

To discriminate between two mechanisms that could drive the results, we test the heterogeneous effects of debt relief. We focus on two sources of heterogeneity – the size of DSSI relief and the share of private creditors in debt service – and estimate their effects in a difference-in-differences framework using the projection method. local. This analysis shows that the decline in bond spreads for DSSI-eligible countries is greater for countries that have a higher share of debt service due during the eligibility period (between May and December 2020, graph 2, part A). On the other hand, the fall in spreads does not depend on the size of private creditors (Chart 2, Panel B). As there is no increase in spreads, not even for countries that owe a large portion of repayments to private creditors, these results do not support the presence of a stigma effect. On the contrary, the results are consistent with a positive liquidity effect due to the postponement of debt service due in 2020.

Figure 2 Cash flow versus stigma

A) Size of DSSI relief

B) Share of private creditors

Remarks: The figures plot the impulse response functions of the differential effect of the DSSI announcement (t = 0) between eligible and non-eligible countries on sovereign bond spreads. Panels A and B divide the sample between eligible countries that have benefited from DSSI relief greater or less than 0.5% of GDP and those whose debt service due to private creditors is greater or less than 60% of the total debt service due under the DSSI (the two thresholds are median values). See description in main text. Data source: Bloomberg and IMF World Economic Outlook.

Discussion

The international community is currently discussing the possibility of extending the current initiative to suspend debt service in developing countries until 2021. Our results suggest that this simple moratorium on neutral NPV debt – involving no discount for creditors – can effectively help countries overcome the crisis.

Our findings also add to the larger literature on debt restructuring. They show that rapid and unconditional debt rescheduling to countries facing short-term liquidity shocks can be an effective instrument of financial support that can help avoid severe defaults (Trebesch and Zabel 2017). In addition, our results support the design and adoption of simple conditional government debt instruments with floating grace periods to help poor countries mitigate their exposure to negative shocks (Cohen et al. 2008).

Two final qualifications are important. First, our results could be generalized to other situations where countries face a short-term crisis. In the presence of severe negative shocks, only the deferral of debt service could help reduce borrowing costs. However, this does not mean that the suspension of debt service will be the optimal response to the Covid-19 crisis in the months to come. If the shock persists, the liquidity crisis could evolve into a solvency crisis, as a change in the long-term growth rate of the economy would affect debt sustainability. In such a scenario, a reduction in the debt stock might be necessary to reduce debt distress and restore debt sustainability. Second, our analysis focuses on NPV neutral debt relief provided by the public sector. How the markets would react if private creditors also joined the initiative (as requested by the G20 and major international financial institutions) remains an open question.

The references

Abadie A and J Gardeazabal (2003), “The Economic Costs of Conflict: A Case Study of the Basque Country”, American Economic Review 93 (1): 113-132.

Bolton P, L Buchheit, PO Gourinchas, M Gulati, CT Hsieh, U Panizza and B Weder di Mauro (2020a), “Born of Necessity: A Debt Stop for COVID-19”, CEPR Policy Insight n ° 103.

Bolton P, M Gulati and U Panizza (2020b), “Legal air coverage», VoxEU.org, October 13.

Bulow J, C Reinhart, K ​​Rogoff and C Trebesch (2020), “The debt pandemic», IMF Finance and Development, Fall.

Cohen, D, H Djoufelkit-Cottenet, P Jacquet and C Valadier (2008), “Lending to the Poorest Countries: A New Counter-Cyclical Debt Instrument”, Working Paper 269, OECD Development Center.

Djankov S and U Panizza (2020), “COVID-19 in Developing Economies: A New eBook», VoxEU.org, June 22.

Cor S, C Reinhart and C Trebesch (2020), “China’s foreign lending and the looming developing country debt crisis», VoxEU.org, May 4.

Landers C, N Lee and S Morris (2020), “Over $ 1 trillion in MDB firepower exists as COVID-19 ‘shattering glass’ moment approaches”, Center for Global Development.

Lang V, D Mihalyi and AF Presbitero (2020), “Debt relief, liquidity provision and sovereign bond spreads”.

Marchesi S and T Masi (2020), “Debt restructuring during COVID-19: private and official agreements», VoxEU.org, May 4.

Trebesch C and M Zabel (2017), “The output cost of hard and soft sovereign default”, European Economic Review 92: 416-432.

Xu Y (2017), “Generalized synthetic control method for causal inference with cross-sectional time series data”, Policy Analysis 25: 57-76.

End Notes

1 See reports from international institutions (IMF 2020, World Bank 2020), Think Tanks (ODI 2020) and press articles in The Economist and Reuters, among others. More details on DSSI can be found here and on the World Bank website.

2 Since the dynamics of sovereign spreads depend on fiscal and economic performance, we take the growth of real GDP, the current account, the fiscal balance and the public debt (all in shares of GDP) as macroeconomic variables to construct the synthetic control. . Additionally, to compare countries with similar bond spread dynamics before DSSI, we match the spread levels to specific dates. Finally, to take into account the differences in the intensity of the Covid-19 crisis, we use the number of cases per inhabitant. See Lang et al. (2020) for more details.


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Global creditors agree to debt relief for poor countries affected by pandemic

Frenchman Bruno Le Maire.

Eric Peirmont | AFP | Getty Images

Major international creditors will relieve the world’s poorest countries from paying off their debt this year to help them cope with the coronavirus pandemic that triggered the world’s most brutal downturn since the 1930s, announced Tuesday France.

Finance officials from the United States, China and other major Group of 20 economies are expected to finalize the deal when they meet online on Wednesday, French Finance Minister Bruno Le Maire told reporters.

He said some 76 countries, including 40 in sub-Saharan Africa, would be eligible for debt payments worth a combined $ 20 billion suspended by public and private creditors, with the remaining $ 12 billion in payments owed to institutions. multilateral agreements still to be settled.

“We have obtained a moratorium on the debt at the level of bilateral creditors and private creditors for a total of 20 billion dollars,” Le Maire told reporters. He spoke just before the finance ministers and central bank governors of the Group of Seven (G-7) met by videoconference on Tuesday and gave their support for the temporary debt relief of the world’s largest countries. poor, provided it is supported by the G-20 and the Parisian Club.

In a joint statement, they said they were ready to grant “a time-limited suspension of debt service payments due on official bilateral claims for all countries eligible for concessional financing from the World Bank”. they were joined by China and other countries in the Top 20 Group. savings, and as agreed with the Paris Club Creditors Group.

Sources familiar with the process had told Reuters this week that they expected the G-20 to approve a suspension of debt payments at least until the end of the year, despite some resistance from the China, which has overtaken the World Bank as the main lender to development countries, especially in Africa.

IMF chief economist Gita Gopinath told Reuters that the deal offered “extremely welcome” relief to the poorest countries, freeing up resources that could be used to improve health systems at a time when the world’s poorest countries. resources are strained by falling commodity prices and massive capital outflows.

World Bank President David Malpass in a tweet thanked US Treasury Secretary Steven Mnuchin for hosting the G-7 meeting and supporting his joint call with International Monetary Fund Managing Director Kristalina Georgieva for the status temporary quo of debt.

The World Bank and the IMF have started providing emergency aid to countries struggling to suppress the coronavirus and mitigate its economic impact. They first launched their call for debt relief on March 25, but it was not officially endorsed by the G-20 countries.

The IMF, in its World Economic Outlook 2020, said the pandemic will cause the global economy to contract 3.0%, but warned the impact could be much worse.

Gopinath said the pandemic could be much more severe in developing economies that had yet to see the types of lockdowns already implemented in China, the United States and Europe, adding a “serious downside risk To IMF forecasts.

The forecast provided a grim backdrop for the spring meetings of the IMF and World Bank, which normally draw 10,000 people to Washington but are being held by video conference this week due to the pandemic.

Debt cancellation

In their statement, G-7 officials also called for more contributions to the IMF’s Containment and Disaster Relief Trust (CCRT) and its Poverty Reduction and Growth Trust Fund, that support the poorest countries. They said the debt relief effort should include private creditors on a voluntary basis, as well as efforts to improve debt transparency.

Western countries have for years demanded more transparency on Chinese government, bank and corporate loans, but Beijing has been reluctant to open its books.

A French finance ministry official said private creditors have voluntarily agreed to roll over or refinance $ 8 billion in the debt of the poorest countries, in addition to the $ 12 billion in debt repayment to suspend by countries.

An additional $ 12 billion is owed to multilateral lenders, primarily the World Bank, Le Maire said, urging these lenders to join the debt relief initiative. The IMF on Monday announced $ 215 million in initial debt relief grants to 25 countries from the CCRT. The trust has around $ 500 million, but the IMF wants to increase it to $ 1.4 billion.

Nonprofit groups, Pope Francis and others are increasingly calling for action on the temporary suspension of debt payments by canceling the debts of the poorest countries.

The AFL-CIO trade union federation and nearly 80 other faith groups on Tuesday urged the US government, the IMF and G-20 countries to cancel debt payments from developing countries and mobilize additional resources to support all countries affected by the rapidly spreading pandemic.

French President Emmanuel Macron said in a televised address on Monday that African countries should be helped by “massively canceling their debt”.

He gave no details, but Le Maire said outright debt cancellation should take place on a case-by-case basis and in coordination with multilateral lenders at the end of the year, depending on the situation. economic development of countries as well as the evolution of raw materials. markets and capital flows.


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Joint Statement by the World Bank Group and the IMF Call to Action on IDA Country Debt

Joint Statement by the World Bank Group and the IMF Call to Action on IDA Country Debt

March 25, 2020

Washington DC The World Bank Group and the International Monetary Fund issued the following joint statement to the G20 on debt relief for the poorest countries:

The coronavirus epidemic is likely to have serious economic and social consequences for

IDA Country
, which is home to a quarter of the world’s population and two-thirds of the world’s population living in extreme poverty.

With immediate effect and in accordance with the national laws of creditor countries, the World Bank Group and the International Monetary Fund call on all official bilateral creditors to suspend debt payments from IDA countries that request forbearance. This will help meet the immediate liquidity needs of IDA countries to meet the challenges posed by the coronavirus epidemic and will allow time for an assessment of the impact of the crisis and the financing needs for each country.

We call on G20 leaders to task the WBG and IMF with carrying out these assessments, including identifying countries with unsustainable debt, and preparing a proposal for comprehensive action by official bilateral creditors to meet the needs of financing and debt relief for IDA countries. We will seek the approval of the proposal at the development committee during the spring meetings (April 16 and 17).

The World Bank Group and the IMF believe it is imperative at this time to provide a sense of global relief to developing countries as well as a strong signal to financial markets. The international community would welcome the G20’s support for this call to action.

IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Wafa Amr

Telephone: +1 202 623-7100E-mail: [email protected]

@ IMFSpeaker



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Religious leaders urge Biden to support global coronavirus aid and debt relief

Two religious leaders, including the chairman of a U.S. episcopal committee, have urged the Biden administration to support the release of $ 3 trillion in global contingency funds to help developing countries respond to the coronavirus pandemic.

Writing on February 23 at the White House, the leaders also called on the Group of 20 nations, or G-20, and private groups to cancel all debts and increase aid to the poorest developing countries, to put end to tax evasion and create permanent global bankruptcy. process aimed at preventing future economic crises.

“The letter presents a roadmap on how to address the structures that cause poverty, inequality and the challenges we now face in this great economic crisis,” said Eric LeCompte, executive director of Jubilee USA, an alliance of faith-based development. and the advocacy groups that led the effort.

Bishop David J. Malloy of Rockford, Illinois, chairman of the American Bishops Committee on International Justice and Peace, also signed the letter.

The letter was sent ahead of the virtual meeting of G-20 finance ministers on February 26, where actions to deal with the economic impact of the pandemic will be discussed. US Treasury Secretary Janet Yellen will attend the meeting.

The letter to Biden comes after the president attended the virtual summit of the Group of 7 or the G-7 of major industrialized countries on February 19, in which he pledged that the United States would return to a multilateral approach to address the issues. World challenges.

Debt cancellation would allow developing countries to better cope with the impact of the pandemic, LeCompte told Catholic News Service on February 24.

“These are the solutions that Pope Francis has asked for,” he said. “He has been beating a drum ever since he arrived in the United States in 2015 and gave his speech at the United Nations. It was there that he explained that the financial system must be transformed. . “

As the pandemic began in February 2020, the Pope quickly called for immediate debt cancellation.

While the G-20 countries agreed at the start of the pandemic last spring to suspend payments of debt owed to them by 77 of the world’s poorest countries, further action is needed, LeCompte said.

The letter cited the International Labor Organization’s estimate that 495 million jobs were lost globally in 2020 and a World Bank estimate that up to 150 million people will fall into extreme poverty in 2021 in support of his claims to Biden.

The letter echoes similar demands made to G-20 countries in a February 23 statement from Brussels-based CIDSE, a network of 17 Catholic development agencies from Europe and North America.

“Given the effects of the pandemic in developing countries, the US government must lead the world to access emergency reserve funds,” known as Special Drawing Rights, or SDRs, according to the letter. “These generated funds were crucial in helping economies survive the 2008 financial crisis.”

The two leaders urged the administration to lead a response with the G-20, the International Monetary Fund and the US Congress to generate a $ 3 trillion SDR issue for developing countries.

Legislation was introduced in the House of Representatives to extend the authority to issue SDRs from $ 695 million to $ 3 trillion. LeCompte said he hoped Congress as a whole would pass the measure.

The G-20 includes the European Union, Argentina, Australia, Brazil, Great Britain, Canada, China, France, Germany, India, Indonesia, Italy , Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey and the United States. States.


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Biden officials plan to take action to ease student debt

The Biden administration is examining whether it can take steps to ease student debt through executive action, even as it continues to call on Congress to pass legislation to help borrowers and their families.

A tweet from White House press secretary Jen Psaki appeared to go beyond her comments at a briefing earlier Thursday, when she said President Joe Biden was counting on Congress to act next on student loan relief. Biden said he supports up to $ 10,000 of student loan cancellations per borrower.

“The president continues to support the cancellation of student debt to provide relief to students and families,” Psaki tweeted. “Our team is examining if there are any steps he can take through executive action and he would be happy to be able to sign a bill sent to him by Congress.”

It came hours after a group of Democrats urged Biden to use executive action to write off $ 50,000 in federal student debt for all borrowers. The group, which included Senate Majority Leader Chuck Schumer of New York and Senator Elizabeth Warren of Massachusetts, said it is boosting the economy and helping close the country’s racial wealth gap.

Biden had previously said he supported wiping out student debt of up to $ 10,000 through legislation, but had not shown interest in executive action. During a briefing before posting his statement on Twitter, Psaki appeared to reject the idea of ​​using presidential powers to write off debt, saying Biden had already suspended student loan payments during the pandemic.

“He would look to Congress for the next steps,” she said.

Lawyers have fallen on either side of whether Biden himself has the power to grant loan relief, with some saying the move is unlikely to survive a legal challenge.

The Trump administration took action to block a large-scale debt cancellation in early January, issuing an Education Department note concluding that the secretary did not have the authority to provide such assistance and that it would be up to Congress. .

Schumer said he and Warren had studied the matter and concluded that “this is one of those things the president can do on his own.” Former presidents have written off the debt, Schumer said, but not on the scale proposed.

Democrats insist on the issue as a matter of racial justice and as a relief from COVID-19. They rely on statistics showing that black and Latino borrowers are more likely to take on student debt and take longer to repay their loans.

Representative Ayanna Pressley, D-Mass., Said the student debt crisis “has always been a matter of racial and economic justice.”

“But for too long the narrative has excluded black and Latin communities, and how that debt has exacerbated deep-rooted racial and economic inequalities in our country,” she said.

Representative Ilhan Omar, D-Minn., Also supports the measure, which said it would help millions of Americans who suffered financial losses during the pandemic. “The last thing people should worry about is their student loan debt,” she said.

Calls for debt cancellation have escalated after years of rising tuition fees that have contributed to the increase in national student debt. More than 42 million Americans now hold federal student loans totaling $ 1.5 trillion, according to data from the Department of Education.

In an effort to provide relief shortly after the pandemic struck last year, the Trump administration suspended federal student loan payments and set interest rates at zero percent. When he took office, Biden extended the moratorium until at least September 30.

Some Democrats say that’s not enough, and Schumer said he recently met with Biden to advocate for broader relief.

Forgiving $ 50,000 in student debt would cost around $ 650 billion, Warren said. She says it would be a “big positive” for the economy by allowing more Americans to buy homes and start businesses.

Republicans have pledged to fight any attempt at blanket debt cancellation, saying it unfairly shifts the burden from borrowers to taxpayers.

In a hearing Wednesday with Biden’s candidate for Education Secretary, Senator Richard Burr, RN.C., urged the White House to reject calls for the mass surrender and pursue legislation instead aimed at simplifying loan repayment options.


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G20 Extends Debt Relief Plan As Warnings Are Not Enough

The richest countries in the world have agreed to renew a debt relief initiative for the poorest until at least the first half of 2021, short of a World Bank call for a full year extension then that the coronavirus pandemic is worsening poverty.

The G20, in a statement released by Saudi Arabia, which holds the bloc’s presidency, said it could order another six-month extension next year. The statement said G20 members were disappointed at the lack of progress in extending the debt relief plan to involve private creditors.

In an online press conference, World Bank President David Malpass called for more measures for meaningful debt reduction. “There is an urgent need to make rapid progress on a framework as the risk of disorderly defaults increases,” he said.

The consequences for some countries are disastrous. African countries face a $ 345 billion funding gap through 2023, the IMF said last week, with some forced to choose between servicing debt or spending on health and social programs.

Private credit

The group of industrialized economies unveiled the Debt Service Suspension Initiative in April to provide billions of dollars in relief to 73 eligible countries. So far, more than 40 people have requested the aid, which was to last until the end of December, most of them in sub-Saharan Africa. The World Bank estimates that countries could save US $ 12 billion owed to government creditors this year.

Eligible countries can also ask private creditors to freeze repayments, but only a few have done so – a major failure according to advocacy groups. This point was also addressed by the Managing Director of the International Monetary Fund, Kristalina Georgieva, on Wednesday.

The private sector has “unfortunately” shied away from debt relief, she told a virtual press conference. Meanwhile, “countries themselves have been reluctant to ask the private sector for fear it might erode their future market access, access which they have obtained the hard way in previous years,” she said.

Role of China

Malpass had called on the G20 to extend debt relief until the end of next year, and said hedge funds and China should participate more. China owes nearly 60% of the bilateral debt that the world’s poorest countries are expected to repay this year.

He won the backing of German Finance Minister Olaf Scholz, who on Wednesday called for an agreement that included “many other countries not currently participating in the debt suspension.” China must be “part of the solution,” he said.

Advocacy groups like the European Network on Debt and Development say government support alone is insufficient. In a recent report, he likened the initiative to “emptying the Titanic with a bucket” and argued that it was only pushing the risks of a debt crisis “further down the road”.

Technology Tax

Lack of participation from private and multilateral lenders limited the impact of the program, the network said, noting that only 24% of debt payments owed by recipient countries between May and December 2020 were likely to be suspended.

Extending it to the first half of 2021 would cover 44% of debt payments by countries that have applied to participate, according to the report.

The G20 was also due to discuss digital taxation, but said the pandemic had affected work to that end. Disagreements between the European Union and President Donald Trump’s administration have also hampered years-long discussions over new rules. The Organization for Economic Co-operation and Development now aims to conclude the process by mid-2021, increasing the risk of a transatlantic trade dispute and a proliferation of contentious domestic levies on global tech giants.


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Why poor countries reject debt relief

Not all low-income countries are impressed by the G20 pandemic debt initiative. Many believe they can do better by fundraising in the markets.

Amid fears that the pandemic could wreak havoc in poorer countries, the G20 in April launched its Debt Service Suspension Initiative (DSSI) offering a temporary suspension of official government-to-government debt repayments to 73 low-income countries. The initiative was then extended for six months in October, ensuring that it will continue until the end of June 2021.

But so far, around 40% of eligible countries have not applied for DSSI, raising questions about the effectiveness of these programs and whether the downside of reputation for participating outweighs on the limited gains that result from simply deferring payments rather than completely forgetting the debt. .

With interest rates at record highs, now is the time for African and other emerging countries to borrow and invest more than less

For sovereigns who borrow commercially, the demand for DSSI comes with fear of losing market access. Banks and the private sector have so far resisted membership requests, and even if they did, deferral of payments would likely constitute a technical default with all the stigma that this entails for borrowers.

Aid charities have been vocal in their calls for more debt relief at all levels, but in the investment community some argue the opposite argument that with interest rates at rock bottom lines. highs, now is the time for African countries and other emerging countries to borrow and invest. more rather than less.

Emerging markets specialist Renaissance Capital said in a recent report that due to falling bond yields, emerging markets could add 60% of GDP to existing debt without increasing service costs if interest rates fall. 150 basis points only.

While accepting that currency risk is an issue if borrowing is in foreign currencies, the Renaissance Capital report argued, “We believe that an exciting opportunity (and of course, a risk) arises. Governments in FM [frontier markets] could be able to borrow at 4-6% in the 2020s, which (essentially) if well invested, could stimulate real growth by providing critical infrastructure to enable industrialization. “

Of course, the end result crucially depends on this last point – how much money will be invested. But it’s worth noting that in the IMF’s 2020 growth forecast, among the small group of countries (around 25) that will experience positive growth, many of the same names are on the DSSI list. This does not mean that they are not poor, but it does mean that they have upside potential which can be best achieved by promoting capital inflows rather than suspending debt repayments.

Brian Caplen is the editor of The Banker. Follow him on twitter @BrianCaplen

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The new law will not help alleviate the debt

South Africans’ extremely high debt distress rate is well documented. The gravity of the situation is reflected in the headline of an article in The Economist last year: “In South Africa, More People Have Loans Than Jobs”.

Given that over 40% of active consumers in the country are in arrears of credit and that we have a total debt load of 1.7 trillion rand, our economy and our society are at risk. Obviously, intervention to relieve this crisis is needed. This is recognized by the government, which has commissioned extensive research on the issue. In addition, Parliament recently passed legislation to provide intervention: the National Credit Amendment Act. The president signed the law in August.

While recognizing that the dire situation facing South African consumers is important in the way of alleviating this crisis in our country, this legislation, in its current form, is not what is needed. In fact, many of the industry’s comments aren’t either. For example, it has been suggested that the debt relief proposals could put the banking sector at great risk, as R13-20 billion in debt could be canceled through the provisions of the law. This creates an environment of alarmism and panic which, in our opinion, is not valid.

Industry players making comments like this are reckless, especially as a closer look at the legislation makes it clear that a significant amount of debt is unlikely to actually be written off.

First, the law only provides debt relief for certain debtors: those with household income less than R7,500 per month, who have unsecured debt of less than R50,000, and whose income in relation to the amount owed reflects a situation of over-indebtedness. Since all of these factors must apply for a request for debt intervention to be considered, only a small portion of debtors will be eligible for debt intervention.

The onus is then on the debtor to seek intervention on the debt, assuming he has the knowledge, understanding and resources to do so.

There are enormous communication needs regarding the explanation of the concept, process, rights and obligations to the most vulnerable people in our society, and we have great concerns as to how this could be achieved.

Second, we question the practicality of several of the provisions of the act. It is not clear, for example, how the authorities will be able to carry out an over-indebtedness assessment, as required, for each individual debtor requesting relief. The sheer volumes make it highly unlikely that most people seeking help will be treated.

Another problem that makes the provisions of the law inapplicable is that only one body will have the power to deal with these requests: the National Credit Regulator (NCR).

It is not an organization with a large national footprint – in fact, it only has one office, located in Midrand near Johannesburg. So how could a minor from the Northwest, a rural single mother from the Eastern Cape surviving on welfare, or a farm worker from the Karoo access the services of the NCR?

The most vulnerable debtors in our society are the least likely to have access to tools such as computers and smartphones with Wi-Fi availability, so the RCN would likely need thousands of field workers with physical presence throughout the country. How this will be implemented in practice is unclear.

The law also provides for a complicated two-year financial review process before a debt can be written off. Again, the practical implications suggest that few consumers will reach the end of this process and have their debts written off, even among the small portion of consumers who manage to qualify and successfully apply for debt intervention first. place.

It is estimated that 407 million Rand of taxpayer money would be needed to make the provisions of the law enforceable. This would include funds to communicate important process messages, to pay infantry who should be employed, and to finalize debt write-offs through the National Consumer Court, among other costs.

Considering that it is unlikely that more than R100 million will be written off, the cost / benefit ratio for the year becomes questionable.

It may be much easier to simply write off the debt of those who clearly have no chance of repaying – those who earn less than R7,500 per month, for example.

This way, no industry will find itself at risk and we will not use large sums of taxpayer revenues to fund a process that appears to have many obstacles to success.

Mareesa Kreuser is Legal Counsel and Head of Audit at Summit Financial Partners.

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The Need for Debt-Climate Swaps by Shamshad Akhtar, et al

With developing countries facing a debt crisis that will only worsen as the COVID-19 pandemic continues, it is already inevitable that massive debt relief will be needed. The only question is whether it will be designed to deal with the even bigger climate crisis that is approaching.

ISLAMABAD – A global debt crisis is looming. Even before COVID-19 hit the world, the International Monetary Fund had Posted a warning on the public debt burden of developing countries, noting that half of all low-income countries were “at high risk or already in debt”. As the economic crisis deepens, these countries are experiencing sharp contractions in production at the same time as COVID-19 relief and recovery efforts demand a massive increase in spending.

According to the United Nations Conference on Trade and Development, the repayment of the external public debt of developing countries will cost $ 2.6 to $ 3.4 trillion in 2020 and 2021 alone.Therefore, market analysts now to suggest that nearly 40% of the sovereign external debt of emerging and frontier markets could be in default next year.

Worse, measures to deal with this debt crisis will clash head-on with global efforts to tackle climate change, inequality and other worsening global crises. So we need some creative thinking on how to advance multiple goals at the same time. We must both achieve a solid recovery from the pandemic-induced crisis and mobilize trillions of dollars for the transition to a more financially stable, socially inclusive and low carbon economy.

In April, G20 finance ministers approved a debt service suspension initiative to temporarily suspend the debt service of the world’s poorest countries as they deal with the COVID-19 crisis. Unfortunately, few debtor countries accepted this offer, fearing what it could give to markets and rating agencies. Moreover, private sector lenders have largely refused to offer significant forbearance on their part, thus undermining government efforts.

In the absence of new forms of liquidity support and major debt relief, the global economy cannot return to pre-pandemic growth levels without risking serious climate unrest and social unrest.Climatologists tell us that to meet the targets set in the Paris climate agreement, net global carbon dioxide emissions must fall by around 45% by 2030 and 100% by 2050. Given that the effects of the As climate change is already being felt around the world, countries urgently need to increase their investments in climate change adaptation and mitigation.

But that won’t be possible if governments get bogged down in a debt crisis. On the contrary, debt servicing demands will push countries to seek export income at all costs, including by reducing climate-resilient infrastructure and increasing their own use of fossil fuels and resource extraction. This course of events would further depress commodity prices, creating a catastrophic loop for producing countries.

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Faced with these concerns, the G20 has called on the IMF “to explore additional tools that could meet the needs of its members as the crisis evolves, building on relevant experiences from previous crises”. One of these tools that should be considered is a “climate debt swap” facility. In the 1980s and 1990s, developing countries and their creditors engaged in “debt-for-nature swapsWhere debt relief was linked to investments in reforestation, biodiversity and the protection of indigenous peoples.

This concept should now be broadened to include people-centered investments that tackle both climate change and inequality. Developing countries will need additional resources if they are to have any chance of leaving fossil fuels in the ground, investing enough in climate adaptation and creating job opportunities in the 21st century. One source of these resources is debt relief conditional on such investments.

Such a policy tool would not only put us on the path to recovery, but could also help prevent future debt sustainability issues that could arise as more stocks of fossil fuels and unresilient infrastructure become. “blocked assets. “In addition, the dramatic drop in the cost of renewable energy represents an opportunity for a surge in investment in zero-carbon energy infrastructure, which in itself would help alleviate energy poverty and unsustainable growth.

Some economists estimate that putting the global economy on the path necessary to limit global warming to 1.5 ° C would generate around 150 million jobs worldwide. At the same time, the United Nations Environment Program Production variance report showed that current production plans would push air emissions far beyond the limit of what is sustainable. To meet the goals of the Paris climate agreement, more than 80% of all proven reserves of fossil fuels will therefore need to remain in the ground.

Given the realities of the climate crisis, it would be foolish to include high-risk investments in fossil fuel extraction and infrastructure as part of any recovery strategy. Fortunately, with climate debt swaps, we could actively drive the transition to a low-carbon economy while stabilizing commodity prices and providing fiscal space for developing countries to invest in resilience and sustainability. sustainable development.

There is no doubt that many countries will need debt relief to respond effectively to the COVID-19 crisis and then to protect their climate economies in a socially inclusive manner. For many people in countries most vulnerable to climate change, finding the resources to make such investments is a matter of survival.

The G20 called on the IMF to develop new tools and strategies to present to its summits this fall. An ambitious global deal to swap debt for climate action and social equity should be high on the agenda.


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