The downside for some of debt relief
Posted on 15th May, 2020 in Corporate News
Image Credit: NeilsPhotography
The IMF is an easy target for journalists, analysts and politicians under pressure to come up with a think- piece or a public speech. (The same can be said of many central banks.) Cosseted and living in an affluent bubble yes but it has moved quickly with disbursements to ease the pain of the Covid-19 pandemic. As at 11 May, it had released SDR9.60bn (US$13.26bn) in Africa.
The disbursements were overwhelmingly made within its rapid credit facility and rapid financing instrument, which have final maturities of ten and five years respectively. The instrument, which is designed for less impoverished members, carries an annual interest rate of just 1 per cent. Both credits come without conditionality attached, which explains the quick disbursements. Borrowers are required to work with the Fund to ease balance-of-payments pressures.
Bilateral debt relief is proving more of a challenge. In March the G20 group of nations agreed to freeze debt service due until end-2020 from borrowers eligible to tap the World Bank Group’s ‘soft’ IDA window. This is said to cover 73 countries, and the debt service in question has been estimated at US$17bn.
China was party to the G20 agreement. There are, however, legitimate concerns around its stance. It has made huge disbursements in a relatively short space of time, and thereby eclipsed many other donors. Its lending is not captured in the full OECD data series, and has been estimated at US$150bn for Africa. This is concentrated in a number of countries, notably Angola, the DRC, Ethiopia, Kenya and Zambia. Today’s China is new to rescheduling and debt relief although it has acquired a name for taking over strategic and other valuable assets when its loans have turned sour.
The other challenge surrounding the G20 agreement is its call for private creditors to participate on “comparable terms”. This would trigger ratings downgrades and probable defaults so would not be an obvious step for governments that want to return to Eurobond and other private credit markets. Benin’s finance minister was quoted on the wires as saying that the risk of being shut out of these markets probably outweighed the benefits from the temporary suspension of debt payments.
In response, a number of multilateral agencies have been busy looking for a get-out that would be acceptable to private creditors. Most of the creative thinking has been channeled into the creation of a special purpose vehicle (SPV) underwritten by a leading central bank or multilateral body. Another suggestion has been that the vehicle is guaranteed by the ‘free’ SDRs of rich nations.
Debtor payments into the vehicle are topped up by the Bretton Wood duo, and repackaged into new lending instruments with cheaper/less onerous terms. The get-out is the requirement for creditors to accept that payments by debtors into the vehicle are the legal discharge of their obligations.
The creative thinking would benefit from some familiarity with the workings of markets. We were surprised to see the argument of one senior UN official that bondholders should like the proposals because the underlying bonds are illiquid. This might be true of a tightly-held and single-issue by a government. Broadly, the sovereign Eurobond market is very much alive, most of all where a borrower has built a curve of debt issues.
Our preference is resolution on a case-by-case basis. We have noticed that, whenever the continent is hit by a huge external shock, some of us forget that it consists of more than 50 independent countries. The impact of the Covid-19 pandemic has varied enormously. Microstates built around tourism such as The Gambia are highly vulnerable. The same is true of fragile states that receive sizeable workers’ remittances such as Somalia and South Sudan. Among Eurobond issuers, Zambia looks particularly weak, having made a call for help to all external creditors on 30 March.
Of the 73 countries said to be eligible for the G20 package, we would guess that a maximum of half, and more like one third, have private creditors on any scale. This group will have done its sums and, where possible, would be strongly advised not to apply for the debt relief and to keep their reputation in debt markets. Such a decision would prove helpful whenever we enter the post-Covid era.
Jean Puri
15 May 2020