Analysis: is the “free ride” over for bondholders in poor countries?

LONDON (Reuters) – A year after the onset of the coronavirus pandemic, Ethiopia is set to become a test for how the world’s poorest countries face huge debt as the crisis escalates.

This could be bad news for their private creditors.

Addis Ababa has indicated that it could be the first country with an international government obligation to use a new debt relief framework from the G20 group of major economies that encourages governments to defer or negotiate a reduction in debt. external debt.

Creditors for the most part continued to be paid during the coronavirus crisis despite its immense pressure. The losses were only suffered in places like Argentina, Ecuador, Lebanon and Zambia which were heading towards default anyway.

Ethiopia’s surprise announcement last week, however, inflicted the biggest daily loss on record on its sole bond and affected debt issued by Cameroon and Mozambique – both identified by analysts as vulnerable countries potentially facing to credit problems.

Kevin Daly of investment firm Aberdeen Standard, one of the voices who have pressured countries to continue paying their obligations in international talks over the past nine months, said he expected that this would make investors take a step back and think twice about where they are putting their money. .

“It will be painful for all of us involved,” Daly said. “There will be a revaluation of loans, and how much loan investors certainly want to make in the future.”

Credit rating agencies have warned that even delaying payments of small coupons usually provided by bonds would be a default. Defaults are problematic because they can cause years of legal wrangling that exclude governments from capital markets.

Recently, these markets had started to reopen for around 40 here countries that have received a total of around $ 5 billion in temporary relief under the G20 Debt Service Suspension Initiative (DSSI) put in place last year.

Chart: Debt-to-GDP ratios of DSSI countries with sovereign bonds –

This was aided by the prospect of private sector (PSI) involvement in debt relief which appears to have faded, even as World Bank chief David Malpass continued to criticize creditors for doing a “free ride” in support of the G20.

As of yet, there are no specific details on Ethiopia’s debt plans.

A finance ministry adviser told Reuters on Tuesday it was too early to say what he would do about his sovereign bond, but bondholders know they are in the crosshairs.

The European Network on Debt and Development (Eurodad), made up of 50 non-governmental organizations, estimates that DSSI countries must pay bond holders just over $ 6 billion and other commercial lenders $ 6.5 billion. dollars this year – a total of $ 12.5 billion, not far from the $ 16.6 billion countries owe G20 governments.

That $ 6 billion alone could buy around 2.8 billion COVID-19 vaccines from Oxford-Astrazeneca on the basis of $ 2.15 per injection.

“The age-old question of whether an IMF (International Monetary Fund) program could become a force for debt restructuring is once again topical,” said Nick Eisinger of Vanguard. “We need to pay attention to the assessment of the sustainability of the IMF debt that it provides to most of the (poorest) border countries.”

Chart: DSSI country bonds regain ground –


In sub-Saharan Africa, interest payments absorb nearly 50% of government revenue for Ghana and about 30% for Nigeria and Angola, calculates S&P Global.

Zambia, Mozambique, Republic of Congo and Angola have all seen their indebtedness exceed 100% of GDP, while Morgan Stanley voices concerns over Cameroon, Kenya, Costa Rica, El Salvador, Tunisia , Sri Lanka, Laos and the Maldives.

“The obvious question is who’s next,” said Charles Robertson, chief economist at Renaissance Capital.

Many countries had already seen their debt rise as the pandemic approached, but the economic fallout, shrinking GDP and sharply rising borrowing costs hit the riskiest borrowers hard. COVID-19 saw the average public debt of emerging markets in EMEA reach 63.5% of GDP from 51.8% in 2019.

There are still a lot of unknowns when it comes to a debt overhaul, however.

Vanguard’s Eisinger hopes policymakers push for re-profiling Eurobonds rather than inflicting large-scale losses or “haircuts” as they are called.

Aberdeen’s Daly is hoping value recovery instruments – tied to future income streams or growth – could be part of the mix. And some hope countries will keep paying, arguing that retaining their hard-earned access to debt markets will be more beneficial in the long run than instant debt relief.

“If you sign up to DSSI and try to impose similar terms on your private debt, you risk your reputation in the debt markets,” said sovereign GMO analyst Carl Ross, who has been heavily involved in the debt markets. restructuring of Argentina and Ecuador last year.

“If the formal sector backed down from its insistence and rhetoric on private sector involvement (in DSSI), I think there would be a lot more buy-in.

Chart: Interest expense as% of annual income –

Additional reporting by Tom Arnold in London; Editing by Andrew Cawthorne

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