LONDON (Reuters) – The world’s poorest countries may soon be faced with a tough decision – to double G20 debt relief with warning they must default on private creditors, or quit the program to try to keep the financial markets on the side.
Rich countries on Friday supported an extension of the G20 Debt Service Suspension Initiative (DSSI), approved in April to help developing countries survive the coronavirus pandemic and which has seen 43 of 73 countries potential eligible here defer $ 5 billion in “public sector” debt repayment.
The European Network on Debt and Development (Eurodad), made up of 50 non-governmental organizations, estimates that extending the temporary six-month freeze would provide additional relief of $ 6.4 billion, rising to $ 11.4 billion. dollars if the extension runs until the end of 2021.
That would represent just over a quarter of next year’s combined debt payments for countries already enrolled in DSSI, and would represent up to 4.3% of GDP for countries like Angola, according to Fitch Ratings.
But an important chain can be attached.
Amid warnings that the pandemic could push 100 million people into extreme poverty, World Bank President David Malpass is also calling on banks and investment funds that have loaned DSSI countries to get involved. .
“So far, the relief is too shallow to light the end of the debt tunnel,” Malpass told the United Nations on Tuesday. “Commercial creditors are not participating in the moratorium, draining funding provided by multilateral institutions. “
Kevin Daly of Aberdeen Standard Investments, who is part of a joint private sector response to DSSI’s proposals, believes that opinions such as Malpass’s Average Private Sector Involvement (PSI) – write downs for equity holders bonds – could become “mandatory” as part of the expected extension.
Such a change could be signaled at IMF meetings next month.
Eurodad calculates that DSSI countries must pay private sector bondholders $ 6.4 billion and other private lenders $ 7.1 billion next year, a combined $ 13.5 billion that is more than what the signatory countries owe the governments of the G20.
“We have already heard that there is a strong possibility that this (PSI) could be the case,” Angolan Secretary of State for Budget and Investment Aia-Eza Silva said, adding that the he main focus of Angola remains bilateral creditors like China.
(Graphic: How much debt relief will DSSI bring to countries -)
LOSS OF ACCESS
Charity groups estimate that 121 low- and middle-income governments spent more last year on external debt servicing than on public health systems which are now at the breaking point, which is a strong moral argument for relief.
However, there are other complicating factors.
Rating agencies S&P Global, Moody’s and Fitch have warned that if countries suspend or postpone debt payments to the private sector, it would almost certainly be classified as restructuring and default by their criteria.
Restructuring is complex and generally takes much longer than the affected countries currently do. It would also mean that the poorest countries that have struggled to access international markets over the past decade would lose it just as they face enormous challenges.
Moody’s estimates that they face a combined funding gap of $ 40 billion this year. The Institute of International Finance estimates that the external debt of the countries of the DSSI has more than doubled since 2010 to reach more than 750 billion dollars and now represents on average nearly 50% of the GDP, a high level for their stage of development. .
A total of 23 DSSI-eligible countries have sold Eurobonds, but only a few, such as Honduras and Mongolia, have done so since the program launched in April. Pakistan wants to sell $ 1.5 billion worth of bonds, but creditors would back off if PSI were to emerge.
“It is extremely unlikely that a country that is part of it (DSSI) this year will jeopardize its market access,” said Kevin Daly of Aberdeen. “I don’t think any of them would want to participate.”
(Chart: DSSI debt country bonds -)
Poverty action groups say the private sector is exaggerating the issue, highlighting the speed at which Argentina sold a 100-year bond after one of its restructurings.
A potential ‘carrot’ for countries and their creditors could be Brady bond-type debt swaps, where investors write off certain loans in exchange for new, credit-enhanced bonds with full or partial guarantees from the G20 or multilateral development banks. .
JP Morgan’s bond index arm stirred up discussions about such a plan when it announced this month that enhanced credit debt would be eligible for its emerging markets benchmark from mid-October, just after the main IMF and G20 DSSI meetings.
Eurodad’s Iolanda Fresnillo said debt swaps could be a solution for many countries, although the hardest hit countries would need more extreme measures.
“It’s not just a liquidity crisis, we need to tackle debt sustainability and opt for debt cancellation,” Fresnillo said.
“By simply postponing payments, you are not solving the problems these countries are facing.”
Additional reporting by Andrea Shalal in Washington and Karin Strohecker in London; Editing by Catherine Evans