Sovereign Debt Relief Is Missing One Player: Bondholders

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By Paul Wallace

Harvard’s Reinhart calls on private creditors to join efforts

Nations may shut themselves out of capital markets for years

G-20 Offers Temporary Debt Relief for World’s Poorest Countries

Calls for the world’s poorest countries to be given debt relief so they can use their scarce resources to fight the coronavirus pandemic are getting louder.

Global bond investors may find that they, and not just the likes of the International Monetary Fund and governments providing bilateral loans, will be asked to be part of it.

What’s happened so far?

On Wednesday, the Group of 20 leading economies agreed to provide temporary relief to some countries and supported an IMF plan to set up emergency liquidity lines for developing nations buffeted by the coronavirus crisis.

They said they would suspend “debt-service payments for the poorest countries that request forbearance” from May 1 until the end of the year, a move that would free up about $20 billion, according to Saudi Arabian Finance Minister Mohammed Al-Jadaan. The G-20 called on private creditors to join them.

The IMF and World Bank, which are among the biggest lenders to developing countries, backed the proposal, but haven’t yet stated they will join it. The IMF has already disbursed billions of dollars to countries under its rapid credit facilities this month — including $1 billion to Ghana and $442 million to Senegal — and said that 25 of the world’s least-developed nations can effectively halt interest payments to it for six months.

French President Emmanuel Macron has pushed advanced economies to go beyond a temporary moratorium and cancel large amounts of African sovereign debt, saying it is the right thing “morally, humanely.”

Which countries need debt relief?

It’s unlikely major emerging markets would ask for debt relief, let alone be granted it. The IMF and World Bank said last month it should apply to the 76 so-called International Development Association countries, which are defined as having a gross national income per person of less than $1,175. Around half are in Africa, while the rest are spread across the Middle East, Asia and Latin America. The majority are too small or poor to tap international debt markets, though the group includes several Eurobond issuers, including Ghana, Honduras, Mongolia, Nigeria, Pakistan and Uzbekistan.

Could Eurobonds be affected?

The United Nations Economic Commission for Africa said $44 billion of interest payments due from the continent’s governments in 2020 — including on commercial debt — should be waived to enable them to bolster their health systems and maximize fiscal stimulus. Ethiopia’s prime minister and last year’s Nobel Peace Prize laureate, Abiy Ahmed, backed the idea in a Bloomberg Opinion piece on Sunday.

Another group including Tidjane Thiam, the former head of Credit Suisse Group AG, and Ngozi Okonjo-Iweala, Nigeria’s ex-finance minister, is pushing for a two-year moratorium on Africa’s sovereign debt. Some of the world’s leading economists broadly agree.

Read more: Thiam Sees More Debt Relief Needed for Africa After Moratorium

“It is myopic for creditors, official and private, to expect debt repayments from countries where those resources would have to be diverted from the fight against Covid-19,” said Harvard University’s Carmen Reinhart and Kenneth Rogoff. “Private creditors will have relatively little choice but to cooperate in the short run. Many emerging and developing economies will soon stop paying their debts, anyway. The world needs to get in front of the problem.”

Would bond investors agree?

So far, no major bond investor has publicly said emerging markets should be granted temporary, let alone permanent, succor on their foreign commercial borrowings. And there is no recent precedent of a group of countries being given relief on their Eurobonds, with markets almost always viewing any non-payment as a default.

A group of economists and legal experts, including Lee Buchheit, a veteran restructuring lawyer, outlined one solution. Bond investors could reinvest interest payments they receive this year from poor governments into credit facilities backed by multilateral institutions and to be used for emergency funding related to the virus. That way, countries would avoid defaulting and investors would still receive interest from the credit facilities, even if it was delayed for now.

“As long as the investors believe that the triggering event is indeed rare and that the need for a suspension of normal debt-servicing in light of that event is unavoidable, implementing an orderly suspension of payments can actually be beneficial to both the sovereign debtors and the creditors concerned,” the group said in a paper this week.

Are there arguments against debt relief from bondholders?

Convincing private lenders to take a hit would be tough, according to Renaissance Capital, and they might argue that some governments’ inability to counter the virus is in large part a result of their economic mismanagement in recent years.

“It would be very complicated,” said Charles Robertson, RenCap’s London-based chief economist. “The public sector is paying the upfront costs in the West, and it makes sense that the collective public sectors should support upfront costs in those countries least able to help themselves.”

Another issue is that losses for bondholders would mean losses for the savings of individuals, many of which will have already suffered from last month’s rout in global financial markets.

“On the surface, it may seem like the ‘morally-right’ thing to do,” said Thomas Christiansen, a money manager in London with Union Bancaire Privee. “But the ultimate owners of that debt may be nurses, teachers and firefighters through their pensions.”

Others, including Standard Chartered Plc’s chief economist for Africa and the Middle East, Razia Khan, warn that any attempt by countries to unilaterally halt debt payments could lock them out of global capital markets for years.

“This access is very important to the continued and sustainable development of African economies as the pool of capital it provides is substantially larger than the developmental-finance or multilateral resources,” said Rodrigo Olivares-Caminal, a professor in banking and finance law at Queen Mary University of London. “Taking actions that would likely increase the cost of much-needed funding for business expansion or infrastructure could have very costly and undesired consequences.”

— With assistance by Alec McCabe

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