Debt relief for poor countries is not as easy as it sounds: analysts
LONDON (Reuters) – Some prominent sovereign creditors are reporting a tentative willingness to help poorer countries ease their debt during the coronavirus pandemic – but many are also warning that it won’t be as straightforward as it looks.
Last week’s agreement by G20 governments to freeze up to 77 debt payments from the poorest countries for the rest of the year came with a warning from the World Bank chief that private investors should not not expect a “free ride”.
All are fully aware of the problem. Defaults are already starting and across Africa, where the World Health Organization warns of up to 10 million cases of coronavirus within six months, countries face a combined bill of 44 billion in debt service dollars this year alone.
Charity groups also estimate that a larger group of 121 low- and middle-income governments spent more last year on servicing their external debts than on their public health systems, now at the breaking point, making impossible to ignore the moral arguments in favor of relief.
“There is clearly a willingness on the part of (private sector) creditors to be constructive, to give a little breathing room,” said struggling debt veteran Hans Humes of Greylock Capital.
Humes was part of Heavily Indebted Poor Country initiatives in the past, and he is now involved in an Institute of International Finance (IIF) group aimed at coordinating efforts to support the private sector.
“The economic contraction has been breathtaking,” he added, not to mention that countries had to prioritize their resources to save lives.
Beyond goodwill and understanding, however, there are serious complications.
David Loevinger, managing director of the emerging markets group at fund manager TCW, said debt relief ultimately equates to debt restructuring. Restructuring is complex and usually takes much longer than the affected countries currently do.
As a result, targeted International Development Association (IDA) countries will have to decide whether to continue paying their obligations or stop spending the money on ventilators and drugs instead.
“For many IDA countries not servicing their debt will be the right decision and as a creditor we understand that and are happy to work with countries,” Loevinger said during an online panel of the ‘IIF.
“But it will be seen as a default by the credit rating agencies and it is a problem that we will have to face.”
GOOD WILL, BAD RESULT?
The IIR estimates that the total amount of external debt in the G20 Debt Service Suspension Initiative countries has more than doubled since 2010 to more than $ 750 billion. Debt now averages over 47% of GDP in these countries as well, a high figure given their stage of development.
TCW’s Loevinger warned that defaults could make countries vulnerable to attacks from contentious vulture funds. In the past, there have been examples of certain funds attacking government assets or property.
Campaign groups have called for the New York and London laws that govern most sovereign debt contracts to be temporarily changed to protect governments from these risks, but even that could cause problems.
Private investors are already worried that emergency loans from the International Monetary Fund will further increase countries’ debt levels. They will also have priority for repayment in the future, leaving less money for the service of other obligations.
The suspension of traditional legal rights would also raise questions about what will happen in the next crisis, whether it is another health epidemic or the locust plagues that have recently ravaged East Africa. , the Middle East and South Asia.
Nick Eisinger, director of emerging fixed income markets at Vanguard, said the risk of driving up borrowing costs meant it was very difficult for the G20 to “force” private creditors to participate in debt relief. debt.
Even the IIR, which is leading efforts to coordinate private investor participation, says any relief in the sector should be voluntary and only considered for countries that make a formal request.
“For the moment, it would be a gesture of goodwill and not legally binding. Many countries will not want to compromise their access to the Eurobond market either, ”said Eisinger.
He felt that might not make a huge difference either. Eurobond coupon redemptions for sub-Saharan African countries this year are about $ 2.5 billion in 2020, rising to about $ 3 billion next year, but so-called principal payments are only a few hundred million.
“For me, if there is an insistence on involving private creditors, it will do a lot more damage than support because it will disrupt significant sources of private finance.”
Greylock’s Humes had an additional warning that countries should not try to use it as a quick fix for their finances.
“Countries that try to use this as a solution to longer term problems are not constructive.”
Reporting by Marc Jones and Tom Arnold; Additional Reports and Karin Strohecker; Editing by Hugh Lawson