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WASHINGTON (Reuters) – G7 finance ministers on Friday backed an extension of the G20’s bilateral debt relief initiative for the world’s poorest countries, but said it needed to be revised to address shortcomings. shortcomings that hinder its implementation.

In a lengthy joint statement, ministers from the Group of Seven advanced economies said they “deeply regret” the decisions of some countries not to participate by classifying their public institutions as commercial lenders.

Two officials from G7 countries said the benchmark was clearly aimed at China, which declined to include loans from the state-owned China Development Bank and other government-controlled entities in the total official of its bilateral debt when dealing with countries seeking debt relief.

Ministers also acknowledged that some countries will need further debt relief in the future and urged the Group of 20 major economies and Paris Club creditors to agree on terms by the meeting. G20 finance ministers next month.

“Everyone was disappointed with China’s lack of transparency and engagement,” said an official, who asked not to be named.

In an online meeting hosted by US Treasury Secretary Steven Mnuchin, ministers underlined their commitment to working together to support the poorest and most vulnerable countries, which have been hit hard by the coronavirus pandemic.

They called on the International Monetary Fund and the World Bank to provide regular updates on the financing needs of low-income countries and to propose solutions to expected financing gaps, including through instruments to leverage advantage of access to private finance.

They said the Debt Service Suspension Initiative (DSSI) endorsed in April by G20 countries, including China, had helped 43 countries defer $5 billion in official debt service payments in order to release money to respond to the pandemic.

But the total is well below the $12 billion in savings originally projected and represents just over half of the more than 70 eligible countries.

Ministers said the initiative should be expanded, “in the context of a request for IMF financing”, and called for a new condition sheet and memorandum of understanding to improve its implementation.

The ministers said that claims classified as commercial under the DSSI would also be treated as such in future debt treatments and for the implementation of IMF policies, sternly reminding China and other countries that do not have not been fully transparent about the scope and terms of government loans to the poor. countries.

Ministers also called again on private lenders to implement the on-demand debt relief initiative, noting that the lack of private sector participation has limited the potential benefits for several countries.

Staden bus

CAPE TOWN – The COVID-19 crisis is pushing Africa to the brink of financial collapse. African governments are under pressure to continue servicing their external loans, leaving them few resources to deal with a historic pandemic and its economic fallout. Without external support – in particular, a global freeze on repayments – some African economies will succumb under the burden of their debt. The resulting domino effect could jeopardize the development of the entire continent and also harm the richest countries.

The response from the international community so far has been mixed. The most notable milestone to date – the G20 Debt Service Suspension Initiative (DSSI) for the world’s poorest countries – only covers official bilateral debt. But 61% of African DSSI countries’ debt service payments this year will go to private creditors, bondholders and multilateral lenders like the World Bank. And, despite assurances from the G20, some countries joining the DSSI were subsequently downgraded by global rating agencies.

The World Bank has played an unnecessary role here. Although its chairman, David Malpass, recently called for more debt relief and even raised the possibility of cancellation, he has also resisted calls to the Bank itself (one of Africa’s major lenders). ) to freeze debt repayments. Instead, the US-dominated institution seems more interested in scoring political points by urging the Development Bank of China to join the G20 initiative, even if it would actually affect only one. African country.

Geopolitics also derail the promising option of a new allocation of Special Drawing Rights from the International Monetary Fund (its global reserve asset) to unlock additional liquidity. This initiative is meeting resistance from the administration of US President Donald Trump, which fears that part of the funds will be channeled to countries like Iran.

A major problem for Africa is that it now has significant private sector debt. In May, a group of 25 of the continent’s largest private creditors was formed, in consultation with the United Nations Economic Commission for Africa (UNECA). The organization’s executive secretary, Vera Songwe, lobbied for Africa’s debt to be bundled into an instrument resembling secured debt, backed by an AAA-rated multilateral financial institution or central bank. This would save countries time by quickly granting them a two-year repayment freeze to deal with the pandemic, without preventing them from exploiting future credit markets to finance economic recovery.

But private creditors were quick to reject these comprehensive approaches, insisting that African countries’ debt should be dealt with on a case-by-case basis. This risks wasting so much time that many countries could default while they wait, which would be particularly maddening given the large profits these creditors have made by chasing Africa’s skyrocketing returns.

While neither of these proposals is a quick fix, Africa’s debt problem is not unsolvable. The continent’s debt service payments in 2020 amount to $ 44 billion. That’s a lot of money, but it’s a small change from the trillions of dollars that governments in rich countries are pumping into their own economies.

Pious lamentations about how “the poorest countries will suffer the most” accompany the infighting among Africa’s creditors. This answer assumes that if Africa’s plight is regrettable, it is also far away, and the continent will suffer quietly in its corner. Today, such thinking is terribly naive.

Until the start of this year, many African economies were experiencing robust growth. Now, without outside help to weather the COVID-19 storm, these countries could face economic collapse. It will directly affect the rich world in a way they are not prepared for.

For China, the current debt crisis represents its biggest political setback to date in Africa. The mainland’s economic value to China may have diminished somewhat, but its political value as a reliable voice bloc in multilateral institutions is increasing. If Democratic challenger Joe Biden wins the US presidential election in November, China will face concerted pressure within these organizations. And although China has adhered in principle to the G20 DSSI, its candidacy remains fragmentary and opaque.

The political costs are rising. China is currently facing a chorus of debt-related disapproval in Nigeria, both on social media and in the country’s House of Representatives. Nigerian politicians are demanding an audit of every Chinese loan to the country – an unprecedented move in Sino-African relations. If the economic and debt crisis worsens, this hostility will spread across the continent.

In previous difficult times, African opposition parties campaigned against the Chinese presence in their countries. Increased economic chaos can lead not only to an erosion of high-level African support for China in forums like the UN, but also to populist targeting of Chinese businesses and citizens.

The American engagement in Africa has a strong military and counterterrorism component. American policymakers should therefore be concerned that the Islamic State (IS) recently took control of a port in Mozambique. Africa has 1.2 billion inhabitants, with an average age of 19. A continent of adolescents without economic prospects will not be difficult to radicalize.

Europe is already grappling with the scandal of Greek authorities abandoning African migrants, leaving them to die on the high seas. If African economies collapse, Europe will face an unprecedented migration crisis that eclipses that of 2015, which almost sparked right-wing populist takeovers in several EU countries.

The cost of helping Africa weather this debt storm is miniscule, while the costs of not doing so are staggeringly huge. Many European Union member states have joined the DSSI, and they could support its extension when the G20 and the Paris Club of Sovereign Creditors meet again later this year. But avoiding nightmarish scenarios will require innovation. All of Africa’s financial partners, including multilateral institutions, private creditors and governments of rich countries, must join ECA and other African stakeholders to find a comprehensive and rapid solution.

Cobus van Staden is Senior Foreign Policy Fellow at the South African Institute of International Affairs.

Copyright: Project Syndicate, 2020.
www.project-syndicate.org

Related

China, the world’s largest creditor, is under increasing pressure to cancel its massive debt to poor countries affected by the coronavirus under the Group of Debt Service Suspension Initiative (DSSI). 20, according to a press article. World Bank President David Malpass on Monday called on China to cancel its debt to poor countries affected by the coronavirus, accusing Beijing’s well-capitalized official lenders of not fully participating in the DSSI.

An additional factor in the current wave of debt is the rapid growth of new official lenders, especially several of China’s well-capitalized creditors, ”said Malpass, at an online event hosted by the Frankfurt School of Finance and Management. portfolios dramatically and do not participate fully in the debt rescheduling processes that have been developed to mitigate previous waves of debt, ”the Hong Kong-based South China Morning Post said.

G20 finance ministers agreed to a “time-limited suspension of debt service payments” to the world’s 77 poorest countries at the online spring meetings of the International Monetary Fund (IMF) and the World Bank on April 15 given the grim situation these countries are facing due to the coronavirus pandemic. As part of this DSSI, a payment estimated at US $ 12 billion to be made between May 1 and the end of 2020 has been rescheduled.

According to an article published by the Chinese state-owned company CGTN, more than 100 low- and middle-income countries will still have to pay a total of 130 billion USD in debt service in 2020. In addition, 43 countries have received about five billion USD from the DSSI to finance social, health and economic measures to respond to the pandemic.

China is the largest bilateral lender to most emerging economies, especially lending to hundreds of projects under its Belt and Road Initiative (BRI). Of the amount owed by poor countries participating in the G20 debt plan between May and December this year, 70%, or $ 7.17 billion, was for China. That amount is expected to reach $ 10.51 billion, or 74 percent of the total, next year if the DSSI is extended, the Post report said on Wednesday.

China has been criticized in particular by G7 countries for classifying large public and government-controlled financial institutions as commercial lenders and not as official bilateral creditors. Those critics include Malpass, who said the Development Bank of China (CDB) must participate as the official bilateral lender for the DSSI to be effective, according to the report.

China argued that since the CBD lends on commercial rather than concessional terms, the bank should be treated as a commercial lender. CBD loans to DSSI-eligible countries are highly concentrated in Angola and Pakistan. China said since the adoption of the G20 debt freeze deal in April, it had received more than 20 applications and reached agreements with more than 10 borrowers by the end of July, without specifying the recipients.

For its part, China has been pushing for the World Bank to be included in the DSSI, a move that has so far been pushed back by other World Bank / IMF members. In June of this year, Beijing hosted an online China-Africa COVID-19 Solidarity Summit where the debt situation was discussed, as 40 of the 77 developing countries are located in sub-Saharan Africa.

China’s debt to African countries is estimated to be $ 150 billion in 2018. Reports indicate that China holds about a third of Africa’s sovereign debt as China has extended its funding. to a number of African countries amid concerns over a debt trap and even loss of sovereignty, especially after Sri Lanka ceded its port of Hambantota to a Chinese state-owned company in 2017 for a 99-year lease in the form of a debt swap in the amount of $ 1.2 billion. The Post quoted Mark Bohlund, senior analyst at REDD Intelligence, as saying that there had been no movement on the DSSI extension and inclusion of CBD largely because China did not want to be intimidated on the scene. global.

Bohlund said China does not want to be forced to foot much of the bill for extending the DSSI without any concessions from G7 countries in other areas. In May this year, the New York Times reported that China was inundated with requests for debt relief from several countries, including Pakistan, Kyrgyzstan, Sri Lanka and a number of African countries, asking to restructure, delay repayments or cancel tens of billions of dollars in loans. coming this year.

China faces tough choices. If he restructures or cancels these loans, it could strain their financial system and infuriate the Chinese people, who are suffering from their own downturn. But if China demands a refund when many countries are already angry with Beijing for its handling of the pandemic, its quest for global influence could be threatened, ”he said.

The Group of 20 nations, representing the world’s largest economies, announced on Friday that low-income countries hardest hit by the fallout from the coronavirus pandemic could potentially obtain an extension of their debt repayments beyond the mid-2021, and in the most serious cases, a debt write-off.Read also – Karnataka: 20% of beds in public hospitals will be reserved for children to fight third wave of COVID

The G-20 statement, released after a virtual meeting of finance ministers and central bank governors from the group, said countries had agreed on a “common framework” for debt restructuring ” timely and orderly “which aims to treat creditors equally and negotiate debt. case by case. Read also – Center urges people to follow Covid guidelines and avoid mass gatherings in containment areas during festivals | Key points

But he did not specify which creditors would agree to a possible debt cancellation. China, for example, has repeatedly opposed parts of the debt relief plans. The country, considered Africa’s biggest creditor, is reluctant to give up billions owed to it from its politically strategic projects across the developing world as its own economy slows. Read also – Jadavpur University will organize a free vaccination camp for students; Details to be notified soon

The meeting comes a month after the G-20 agreed to suspend $ 14 billion in debt repayment for another six months to support 73 of the world’s most needy countries in their fight against the pandemic.

Developing countries now have until June 2021 to spend on health care and emergency stimulus programs without worrying about exhausting debt repayments to foreign creditors. Although the pause on debt service payments was greeted as a reprieve, experts pointed to the constraints of a program that excludes private lenders like investment firms, banks and bondholders. Without private sector buy-in, economists say emergency funds from poor countries could simply end up in the pockets of other lenders, regardless of the G-20’s concessions.

The group’s new case-by-case approach to debt negotiations unveiled Friday, also endorsed by the Paris Club, a group of mostly Western sovereign lenders, demands a fair burden-sharing “among all official creditors,” suggesting that China and its disparate lending agencies will have to get on board He calls for private creditors to offer debt treatment at least as favorable as that offered by creditor countries.

Mohammed al-Jadaan, Saudi Arabia’s finance minister and chairman of the G-20 this year, hailed the framework as an unprecedented deal and a major breakthrough in the international debt agenda.

Kristalina Georgieva, Managing Director of the International Monetary Fund, echoed the praise, saying the deal would make the involvement of private creditors more likely and increase the sustainability of our action.

Nonetheless, she warned that the debt crisis was not over, adding that we needed additional support through debt relief and new financing. “

The group also announced on Friday that it would meet again next spring to see if the economic and financial situation requires “an extension of the debt suspension for another six months. A repayment schedule of 5 to 6 years can be expected. offered to eligible countries requesting it to individual creditors.

Before COVID-19 hit, much of the developing world, which was already in dire need of doctors and medical equipment, was spending huge portions of its income to service external debt. Now that the pandemic has closed borders, halted tourism, lowered oil prices and wiped out remittances, poverty is increasing and resources are dwindling.

International aid groups have been pushing for more debt relief and partial forgiveness rather than a simple suspension, arguing that poor countries should not cut spending much needed on stimulus packages and under health systems. pressure.

Ahead of Friday’s finance meeting, more than a thousand medical professionals around the world sent a letter to the G-20 urging debt cancellation for developing countries. “It is perverse that poor countries have to pay $ 3 billion a month in debt repayment to rich banks, investment funds or the World Bank, while their populations are sinking further into poverty and destitution, wrote Chema Vera, Acting Executive Director of Oxfam International.

(AP copy)

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Support to the world’s poorest countries in the form of debt suspension of the G20 group of rich countries is well below what was expected at the start of the coronavirus crisis, with just $ 5.3 billion in bilateral debt repayments due to be suspended so far this year.

This is far less than the $ 11.5 billion or more expected from official creditors; furthermore, no country has demanded similar treatment from private creditors, despite strong encouragement from the G20 and debt activists.

The G20 released the figure after a meeting of its finance ministers and central bank governors on Saturday, to a scathing response.

David Malpass, president of the World Bank, criticized the group for its lack of debt relief and said more needed to be done.

World Bank data shows that the 73 countries eligible for the G20 Debt Service Suspension Initiative (DSSI) launched in May could delay payments worth $ 11.5 billion this year, and 41 countries have so far requested to do so, for a total of $ 8.8 billion.

This flies in the face of the G20 statement that 42 countries have asked to defer payments worth $ 5.3 billion. Of this amount, nearly $ 2 billion will be reported by China alone, according to a breakdown of the figures seen by the Financial Times.

The total does not include loans from the Development Bank of China, according to the breakdown document, which said that “China encourages CBD to participate in DSSI [as a commercial creditor] under comparable conditions ”.

Mr. Malpass said that “all official bilateral creditors, including domestic banks, should implement the DSSI in a transparent manner. For example, the full participation of the Development Bank of China as an official bilateral creditor is important for the initiative to work.

He said the G20 should do more to ensure transparency and consistent treatment, to “avoid the ongoing secret rescheduling in some countries, such as Angola and Laos, often with undisclosed deadlines and grace conditions.” .

He also urged the G20 to extend the DSSI until next year and move beyond the suspension of debt service and “open the door to consultations on the debt overhang itself and effective means. reduce the net present value of bilateral and commercial public debt for the poorest. countries.”

If so, it would almost certainly make bilateral debt relief conditional on similar treatment by private creditors, which many sovereign borrowers have been reluctant to seek for fear of damaging their creditworthiness and therefore their access to markets. international capital.

Emerging market governments have raised nearly $ 90 billion by selling bonds in global markets since April 1, according to the Institute of International Finance, often at lower interest rates than those available before the outbreak. coronavirus thanks to the trillions of dollars injected into capital markets by the US Federal Reserve and other advanced economies central banks.

Debt activists have reacted with dismay to the G20 statement and the World Bank’s response.

“I am surprised that the World Bank, as one of the stewards of global development, is not seized by a greater sense of urgency,” said Gayle Smith, president of One Campaign and former special assistant to the president Barack Obama.

She said the Bank was taking more debt repayments from poor countries than it was disbursing in emergency loans and should join bilateral creditors in freezing debt service. She also criticized the lack of transparency and confusion over the amounts of debt benefiting from the G20 initiative.

“If I was in my old seat I would be tempted to ask what’s going on in the name of God if we can’t even pin down the numbers,” she said. “As if we needed another reminder that the world doesn’t act globally, here’s another.”

A G20 spokesperson said more debt relief deals could still be reached, so the eventual total amount could be higher.

This article has been edited after publication to note that total debt relief may increase.

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The G20 rich country group is preparing to extend its debt relief offer to the world’s poorest countries until next year, but faces growing criticism for its limited ambition in the face of a growing crisis in emerging economies.

G20 ministers will meet at this week’s annual meetings of the IMF and World Bank on Wednesday, when they are expected to announce a six-month extension of the group’s Debt Service Suspension Initiative (DSSI) under from which 73 eligible countries can apply to G20 governments and their political banks to defer debt repayments due this year and spread them over four years.

The initial initiative was announced as the pandemic took hold around the world this spring, to offer short-term relief to poor countries struggling to meet immediate health, social and economic costs.

But, if confirmed, the extension will be less than requested by recipient countries.

A meeting this month of the United Nations Economic Commission for Africa, the Institute of International Finance which represents private sector creditors and a group of African finance ministers called for the ISDB to be extended until the end of 2021.

The G20 has also been criticized for failing to take into account the views of debtor countries.

A statement released after the meeting said “all stakeholders, including debtor countries and the private sector, should have a seat at the table and their views should be taken into account.”

Stephanie Blankenburg, head of debt and development finance at the United Nations Conference on Trade and Development, said: “There is an agreement between the advanced and developing countries of the G20 to represent only the interests of creditors. . We are absolutely not talking about how the debtor countries could receive their proposals. ”

In particular, she criticized a separate G20 plan for over-indebted poor countries, which will consider cuts and write-downs on a case-by-case basis next year.

It makes the relief of the G20 countries conditional on debtor countries seeking the same treatment from private creditors, including commercial banks and bondholders.

Ms Blankenburg said: “This places a huge burden on eligible developing countries, which tend to be small and poor.”

David Malpass, president of the World Bank, also criticized the efforts of the G20.

Speaking on Tuesday, he said that “the G20 is a forum primarily for creditors and he has been reluctant to move forward with the broader theme [of debt relief]”.

“Bilateral creditors are looking to get as many repayments as possible,” he said. Mr Malpass has repeatedly criticized G20 members for not fully participating in the initiative.

According to the IMF, 44 countries have applied to participate in the DSSI, deferring about $ 5.3 billion in repayments this year, less than half of the potential savings of $ 11.5 billion estimated by the World Bank.

The amount carried forward represents about a tenth of the increase this year in the external financing needs of the 73 countries eligible for the DSSI, estimated by the IMF at around 54 billion dollars.

Of the 44 countries that have used the DSSI, only three have requested comparable treatment from private creditors and no agreement has yet been signed, according to the IMF.

Mr. Malpass also criticized China’s partial involvement in the DSSI. Some Chinese creditors rescheduled principal payments but continued to collect interest, with deferred debt still subject to interest “so this will increase the debt burden of poor countries rather than ease them,” he said. declared.

China has become the main lender to many poor countries around the world in recent years. World Bank data released this week shows that its share of debt owed by the 73 countries in the DSSI fell from 45% in 2013 to 63% at the end of last year, when the combined debts of the 73 countries amounted to $ 744 billion.

China has been criticized for treating its large strategic banks as commercial rather than public lenders, meaning they have a choice of whether or not to participate in DSSI. China says it is a full participant in the DSSI and has provided nearly half of the relief negotiated so far this year.

This article has been modified after publication to correctly reflect the magnitude of countries’ borrowing needs.

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.

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.”

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Washington: The World Bank is looking for ways to reduce the amount of debt of poor countries – rather than simply delaying payments – to attract more investors in the wake of the global pandemic and recession, President David Malpass said.
The coming months and the annual meetings of the World Bank and the International Monetary Fund in October present a good time horizon for action, Malpass said Wednesday in an interview on Bloomberg Television with Tom Keene. Malpass said he also sees an opportunity to expand relief under the Debt Service Suspension Initiative which began in May through 2021, an option he says will be supported. of the Group of Seven and the Group of 20 major economies.

“The next step is more difficult – a deal to actually do haircuts or cutbacks,” said Malpass. “But this has happened in the past; for example, in the 1980s, during the latin debt crisis, it happened to haircuts, but it took so long that countries were in very, very serious difficulties by the time it was ‘is produced. So one of the things we are trying to do is speed this up so that you can get a good result sooner. “

At a meeting in July, the G-20 said it would decide to extend the current suspension of debt payments closer to year-end, postponing assurances of further relief as the pandemic virus continues to burn around the world. Even with the April G-20 agreement to forgo bilateral debt payments from vulnerable countries, the cost of servicing bonds crowds out health and social spending.

China owes nearly 60% of the money the world’s poorest nations are expected to repay this year, according to World Bank data, and the nation has made numerous loans to developing countries on terms that are not transparent and at higher interest rates. than nations can afford, said Malpass. This underscores the importance of China’s participation in debt relief, he said.

Many Chinese credit agencies, including the Export-Import Bank of China, “participate in DSSI with the restructuring terms that other countries are using,” Malpass said. “Some of them aren’t, which creates the challenge we’re working on – by disclosing it.”

The Ex-Im Bank of China and the Development Bank of China finance a fifth of major infrastructure projects in Africa, according to consultancy firm Deloitte. In a separate interview later Wednesday, Malpass said that based on the characteristics of its outstanding debt, the BDC should participate in the global debt relief initiative as an official bilateral creditor rather than a private creditor, as she sought to do so.

Official creditors have committed through the G-20 agreement to participate in the debt suspension initiative; the private sector is only strongly encouraged to do so.

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Advantageous creditors

In many developing countries, loans are balanced in favor of creditors rather than debtors in terms of legal structure, creating moral hazard that increasingly encourages lending as creditors have an advantage in restructuring scenarios, said Malpass.

“This makes it difficult to come up with debt resolutions that allow light at the end of the tunnel for developing countries,” he said.

Malpass has repeatedly called on the private sector to become more involved in debt relief alongside official creditors and said language regarding the need for comparable treatment could be strengthened. He cautioned that official bilateral aid should not be conditioned on the level of private sector involvement.

Malpass said the World Bank and IMF are working on assessing the debt sustainability of developing countries and will discuss it at annual meetings in October. He said the World Bank wants to prevent a significant portion of its aid from being used by countries at risk of debt problems to repay past loans.

“We want good results for developing countries and especially for the poorest,” he said. – Bloomberg

Read also : Saudis set to join landmark Israel-UAE peace deal, Trump says

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Josh Lipsky and Jeremy Mark |
Posted:
May 22, 2020 9:59:24 PM

| Update:
May 30, 2020 9:58:04 PM

Even before COVID-19 began its deadly spread across their borders, developing countries were absorbing severe economic shockwaves emanating from China and advanced economies. And now, in addition to falling commodity prices and falling export demand, they are facing a sharp drop in emigrant and expatriate remittances, the disappearance of tourism, outings. sudden and massive foreign capital and currency depreciation.

Almost overnight, dozens of low-income countries became unable to repay their debts to sovereign and commercial creditors.

Despite all the talk about a global economic recovery later this year, policymakers in developing countries increasingly fear a prolonged slowdown. And now they must prepare for the impact of a deadly disease while lacking both adequate health infrastructure and the financial firepower of advanced economies.

Without immediate international action, developing countries will therefore be faced with a huge humanitarian crisis. The Managing Director of the International Monetary Fund, Kristalina Georgieva, recently warned that 170 countries could experience negative per capita income growth in 2020. In the developing world, this will cause crushing hardship for people already struggling to meet their needs. of their family. In fact, given widespread lockdowns aimed at tackling the spread of the virus, many stand to lose far more than their jobs: it’s not alarmist to say they could starve.

Of course, the international community has taken important steps to buy time for developing countries. The IMF and World Bank recently announced debt service relief for the world’s poorest countries until the end of 2020, and are rapidly disbursing additional funding – mostly in the form of additional loans. G20 governments have followed suit by freezing repayments on bilateral loans owed this year and called on commercial creditors to follow suit – a result that could free up to $ 40 billion.

More importantly, China has joined the G20 initiative, having previously refused to join multilateral debt relief efforts. A few years ago, the Chinese government vetoed a proposed Paris Club membership by sovereign creditors. Last year, he was also reluctant to share data with the IMF regarding debt restructuring in Africa.

However, the moratorium only postpones the day of the accounts by a few months. If debt payments resume next year, low-income countries will still face a burden that is hampering their response to the crisis. One solution would therefore be for the G20 to extend its debt service freeze until at least 2021, potentially making more than $ 50 billion available next year.

But now is also the time to consider major debt relief – perhaps along the lines of the Heavily Indebted Poor Countries (HIPC) Initiative, the most recent multilateral debt relief program. This program – launched in the mid-1990s under the auspices of the IMF and the World Bank, and with the participation of the Paris Club – provided about $ 76 billion to 36 countries, boosted social spending in the poorest economies and helped spark a resurgence, especially in Africa.

Before the pandemic struck, sovereign creditors were determined to avoid another HIPC-type effort. But this crisis will inevitably force a reassessment, and an extension of the debt service moratorium should be the first step in that direction.

Private sector creditors have so far been reluctant to embark on a moratorium, but some over-indebted countries are already moving towards restructuring, including of their Eurobond obligations. And while commercial lenders insist that creditor governments should not impose a “top-down” solution, past debt relief models suggest a variety of options, including Brady-style debt swaps and a buyout financed by the Bank. the World Bank like the one undertaken during the HIPC program.

The IMF and the World Bank should lead the way for the next step in debt relief, as they did with the HIPC initiative. Admittedly, the two institutions face financial and legal obstacles, including the obligation to offset their debt relief with their own funds – either contributions from member countries or gold reserves. But an international consensus on the need for debt relief can overcome these obstacles.

China’s participation will be essential, as its loans to Africa alone currently total at least $ 152 billion. China has been extremely hesitant to restructure – let alone forgive – these loans, but has publicly embraced the debt moratorium. At the same time, the Chinese authorities’ continued insistence on bilateral debt negotiations and “market principles” suggests that rhetoric has yet to catch up with practice.

It is essential that Chinese leaders understand the economic and political danger of a developing country debt crisis. Now is the time for China to prove that its recent massive lending to poorer countries was not motivated by debt trap diplomacy, as some have claimed. And the best way to do this is through a multilateral solution that works for both borrowers and lenders.

The same goes for all creditors. Postponing the day of calculating debt on debt will only make the pain of developing countries worse. To help them respond effectively to the twin crisis of disease and recession, the international community must offer swift, bold and comprehensive assistance.

Josh Lipsky, former Senior Communications Advisor and Speechwriter on the Management Team of the International Monetary Fund, is Director of Programs and Policy for the Global Business and Economics Program at the Atlantic Council. Jeremy Mark is a former senior communications advisor and speechwriter on the management team of the International Monetary Fund.

Project union

By Josh Lipsky and Jeremy Mark

WASHINGTON, DC – Even before COVID-19 began its deadly spread across their borders, developing countries were absorbing severe economic shockwaves emanating from China and advanced economies. And now, in addition to falling commodity prices and falling export demand, they are facing a sharp drop in emigrant and expatriate remittances, the disappearance of tourism, outings. sudden and massive foreign capital and currency depreciation.

Almost overnight, dozens of low-income countries became unable to repay their debts to sovereign and commercial creditors.

For all the speak of a global economic recovery later this year, policymakers in developing countries increasingly fear a prolonged slowdown. And now they must prepare for the impact of a deadly disease while lacking both adequate health infrastructure and the financial firepower of advanced economies.

Without immediate international action, developing countries will therefore be faced with a huge humanitarian crisis. The Managing Director of the International Monetary Fund, Kristalina Georgieva, recently warned that 170 countries could experience per inhabitant income growth in 2020. In the developing world, this will cause considerable hardship for people who are already struggling to provide for their families. In fact, given widespread lockdowns aimed at tackling the spread of the virus, many stand to lose far more than their jobs: it’s not alarmist to say they could starve.

Of course, the international community has taken important steps to buy time for developing countries. The IMF and the World Bank recently ad debt service relief for the world’s poorest countries until the end of 2020, and rapidly disbursing additional funding – largely in the form of additional loans. G20 governments have followed suit frozen bilateral loan repayments due this year, and called on commercial creditors to do the same – an outcome that could release up to $ 40 billion.

More importantly, China has joined the G20 initiative, having previously refused to join multilateral debt relief efforts. A few years ago, the Chinese government vetoed a proposed Paris Club membership by sovereign creditors. Last year, he was also reluctant to share data with the IMF regarding debt restructuring in Africa.

However, the moratorium only postpones the day of the accounts by a few months. If debt payments resume next year, low-income countries will still face a burden that is hampering their response to the crisis. One solution would therefore be for the G20 to extend its debt service freeze until at least 2021, potentially making more than $ 50 billion available next year.

But now is also the time to consider major debt relief – perhaps along the lines of the Heavily Indebted Poor Countries (HIPC) Initiative, the most recent multilateral debt relief program. This program – launched in the mid-1990s under the auspices of the IMF and the World Bank, and with the participation of the Paris Club – provided roughly $ 76 billion in 36 countries, boosted social spending in the poorest economies and helped spark economic recovery, especially in Africa.

Before the pandemic struck, sovereign creditors were determined to avoid another HIPC-type effort. But this crisis will inevitably force a reassessment, and an extension of the debt service moratorium should be the first step in that direction.

Private sector creditors have so far been reluctant to embark on a moratorium, but some over-indebted countries are already moving towards restructuring, including their Eurobond bonds. And while commercial lenders insist that creditor governments should not impose a “from top to bottomOld debt relief models suggest various options, including the Brady-bond style debt swaps and a project financed by the World Bank redeem like that undertaken during the HIPC program.

The IMF and the World Bank should lead the way for the next step in debt relief, as they did with the HIPC initiative. Admittedly, the two institutions face financial and legal obstacles, including the obligation to offset their debt relief with their own funds – either contributions from member countries or gold reserves. But an international consensus on the need for debt relief can overcome these obstacles.

China’s participation will be essential, as its loans to Africa only currently totals at least $ 152 billion. China has been extremely hesitant to restructure – let alone forgive – these loans, but has publicly embraced the debt moratorium. At the same time, the Chinese authorities continued insistence on bilateral debt negotiations and “market principles” suggests that rhetoric has yet to catch up with practice.

It is essential that Chinese leaders understand the economic and political danger of a developing country debt crisis. Now is the time for China to prove that its recent large loans to poorer countries were not motivated by debt trap diplomacy, as some have. claims. And the best way to do this is through a multilateral solution that works for both borrowers and lenders.

The same goes for all creditors. Postponing the day of calculating debt on debt will only make the pain of developing countries worse. To help them respond effectively to the twin crisis of disease and recession, the international community must offer swift, bold and comprehensive assistance.

Josh Lipsky, former Senior Communications Advisor and Speechwriter on the Management Team of the International Monetary Fund, is Director of Programs and Policy for the Global Business and Economics Program at the Atlantic Council. Jeremy Mark is a former senior communications advisor and speechwriter on the management team of the International Monetary Fund.

Copyright: Project Syndicate, 2020.
www.project-syndicate.org

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