GOVERNMENTS IN MANY Poor countries faced a difficult choice this year, between spending to support their people through the Covid-19 crisis and paying creditors. On October 14th, the finance ministers announced the G20 groups of countries offered temporary ointment to 73 of the world’s most needy countries, saying they would extend their debt-suspension initiative (DSSI) suspend debt service payments by July 2021. This was intended to release funds to combat the pandemic (see graphic). However, a permanent solution will take more dramatic action.
National debt in poor countries rose from 29% GDP in 2012 to 43% in 2019 after the IMFand is expected to rise to 49% this year. Crashing tax revenues and swollen deficits make it harder to pay the bills and make foreign investors nervous. According to the World Bank and the three largest rating agencies, at least 33 are the DSSI– Eligible countries were either nearby or in a debt crisis, meaning they were struggling to meet their repayment obligations. The 73 countries that make up the DSSI should spend more than $ 31 billion servicing debt between May and December. About half of this was owed by the 33 countries with the highest tax burden, including Ethiopia, Mozambique and Zambia.
If a wave of sovereign defaults has been avoided, it is because central banks cut interest rates and international financial institutions distributed emergency funds. But neither this nor that DSSIthat only suspends debt service payments can resolve longer-term solvency problems. Where these exist, the best solution is likely to be a quick rescheduling to avoid disorderly defaults. The overwhelming experience of the DSSI helps to illustrate why rapid restructuring could be devilishly difficult to achieve. So far, only around $ 5 billion in debt service payments have been suspended between May and December this year.
One difficulty was that the struggling borrowers shouldn’t sign up in case they worsened their financial situation. The GTwenty encouraged private creditors owed an additional $ 5 billion between May and December to participate, but noted that poor countries feared a downgrade could occur. Some feared that rating agencies would find it bad to approach even official creditors. “We would certainly ask why you have to use this option,” says Tony Stringer of Fitch, a rating agency.
Then it was a matter of getting other lenders on board. The Paris Club of the governments of most of the rich countries was once important enough to be in charge of any restructuring. By the end of 2019, the tense 33 owed around a quarter of their national debt to China, which is not in the club. And although China has joined it DSSI on paper and was one of the largest providers of relief supplies. In practice it has tried to offer the same conditions as in other countries. Issues at issue included whether payments should stop from the date the suspension request was made or when its terms were finalized, and whether countries that are already in arrears should be given relief. China also insisted that the China Development Bank, which provides development loans, is not an official lender and should therefore be excluded from the scheme.
Definitions of private and official creditors are “manipulable, manipulated and completely irrelevant,” says Anna Gelpern of Georgetown University. It is crucial that creditors are treated equally so that they can quickly agree on a restructuring, without realizing that their own sacrifice could fill other creditors’ pockets. If the process is slowed down by Chinese credit institutions, the most pressured of their debtors, the indebted country could get too little relief and later default anyway.
The extension to the DSSI could suggest that lenders are trying to postpone tough restructuring-related issues. Fortunately, however, the G20 also stated that it had in principle agreed on a “common framework” for the rescheduling that could guarantee this G20 creditors and the private sector are treated equally. The details have yet to be worked out before a summit in November. However, if it gets the Chinese authorities to coordinate across their various credit institutions, it could bring real relief. ■
This article appeared in the Finance & Economics section of the print edition under the heading “Aid Measures”.