Poorest countries face tough choice on G20 debt relief plan

LONDON (Reuters) – The world’s poorest countries may soon be faced with a difficult decision: to double G20 debt relief with the warning that they must default on private creditors, or abandon the program for try to keep the financial markets aside.

FILE PHOTO: A man stands next to a board bearing the logo of the G20 Finance Ministers Meeting in Buenos Aires, Argentina, March 19, 2018. REUTERS / Marcos Brindicci / File Photo

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 eligible countries potentials here defer $ 5 billion in “official sector” debt repayments.

The European Network on Debt and Development (Eurodad), which includes 50 non-governmental organizations, estimates that extending this temporary six-month freeze would provide additional relief of $ 6.4 billion, which would rise to $ 11.4 billion. dollars if the extension continues until the end of 2021.

This would represent just over a quarter of next year’s combined debt payments for countries already signatory to DSSI, and would represent up to 4.3% of GDP for countries like Angola, according to Fitch Ratings .

But a meaningful chain can be attached.

Amid warnings that the pandemic could push 100 million people into extreme poverty, World Bank President David Malpass calls for the involvement of banks and investment funds that have lent to countries in the world. DSSI.

“The relief so far is too shallow to light the end of the debt tunnel,” Malpass told the United Nations. “Commercial creditors are not participating in the moratorium, depleting funding provided by multilateral institutions.”

Kevin Daly of Aberdeen Standard Investments, part of a joint private sector response to the DSSI proposals, believes views like Malpass’s Average Private Sector Involvement (PSI) – write-downs for bondholders – could become “Mandatory” within the framework of the expected extension.

Such a change could be signaled at IMF meetings next month.

Eurodad calculates that DSSI countries are expected to pay $ 6.4 billion to private sector bondholders and other private lenders $ 7.1 billion next year – a total of $ 13.5 billion which exceeds what signatory countries owe G20 governments.

“We have already heard that there is a strong possibility that this (PSI) could be the case,” said Angolan Secretary of State for Budget and Investment, Aia-Eza Silva, while adding that the he main focus of Angola remains bilateral creditors like China.

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Charities 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 help.

However, there are other complicating factors.

Credit 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 seen as restructuring and default on their criteria.

Restructuring is complex and generally takes much longer than currently in troubled countries. It would also mean that poorer 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 DSSI countries has more than doubled since 2010 to over $ 750 billion and now averages nearly 50% of 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 in bonds, but creditors would hesitate if PSI were to emerge.

“It is extremely unlikely that a country that has been part of it (DSSI) this year would put its market access at risk,” said Kevin Daly of Aberdeen. “I don’t think any of them would want to participate.”

Poverty action groups say the private sector is overstating the issue, pointing to how quickly Argentina sold a 100-year bond after one of its restructurings.

A potential “ carrot ” for countries and their creditors could be Brady-type debt swaps, where investors write off certain loans in exchange for new enhanced credit bonds with full or partial guarantees from the G20 or multilateral banks. development.

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 main emerging market 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 need more extreme measures.

“It’s not just a liquidity crisis, we have to fight debt sustainability and opt for debt cancellation,” Fresnillo said.

“By simply postponing payments, you are not solving the problems these countries are facing.”

Additional reporting by Andrea Shalal in Washington and Karin Strohecker in London; Edited by Catherine Evans

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