The statistics are grim. 54 governments (25 of them in Africa) spend at least 10% of their revenues on debt servicing. 48 countries with 3.3 billion people spend more on debt servicing than on health and education.
Of these, 23 African countries spend more on debt servicing than on health and education.
These countries are failing to repay their debts and achieve their development goals while the international community stands by.
The G20’s current approach to addressing debt in low-income countries is the Common Framework.
The law requires debtors to first discuss their issues with the International Monetary Fund (IMF) and obtain an assessment of how much debt relief is needed. Next, the government must negotiate with its official creditors, international organizations, governments, and government agencies, about how much debt relief to provide. Only then can the debtor reach an agreement with commercial creditors on terms comparable to official creditors.
Unfortunately, this process is less than optimal.
One reason is that they are too slow to meet the urgent needs of distressed borrowers. As a result, debtor countries will find themselves in financial distress. The resulting uncertainty is in no one’s interest. Zambia, for example, has been working through the G20’s cumbersome process for more than three and a half years, but has yet to reach a final agreement with all its creditors.
The need for a new approach is overwhelmingly clear. The current crisis is not yet a “systemic” threat like the 1980s, when multiple countries defaulted on their debts, but it is a “silent” sovereign debt crisis.
We propose a two-part approach to improving the situation for government debtors and their creditors. This proposal is based on lessons learned from our research on the legal and economic aspects of debt in developing countries, particularly in Africa.
First, we propose that official creditors and the IMF create a “last resort” strategic buyer that can buy the debt of crisis countries and refinance them on better terms.
Second, we recommend that all parties involved in sovereign debt restructuring adopt a set of principles that can be used by debtors and their creditors to reach optimal agreements and monitor their implementation.
Current approaches fail to effectively and equitably address both the concerns of creditors and the full range of legal obligations and responsibilities of debtors. The solution we propose provides debt relief that does not impair a debtor’s ability to meet other legal obligations and responsibilities, while also addressing private creditors’ preference for cash payments.
Our proposal is not without risks. Additionally, share buybacks are not suitable for all debtors. Nevertheless, it is a principled implementation to address a silent debt crisis that threatens to undermine international efforts to address global challenges such as climate, poverty and inequality. We offer possible approaches.
The Fund leverages its existing resources to meet both the desire of bondholders for immediate cash and the need of developing countries to reduce their debt burdens in a transparent and principled manner.
It will also help the international community avoid widespread debt and development defaults.
Bondholders are a big problem
Foreign bondholders, who are the major creditors of many developing countries, are proving particularly difficult to obtain substantial debt relief in a timely manner. In theory, they should be more flexible than official creditors.
Developing countries have paid premiums to bondholders as compensation for providing loans to borrowers deemed to be high risk. As a result, bondholders already receive larger dividends than formal creditors. It should therefore be in a better position than official creditors to assist the debtor in its restructuring process.
However, despite the large profits they make from defaulted bonds, corporate bondholders remain persistent in restructuring their debt.
Our proposals aim to overcome this hurdle in a manner that is fair to debtors, creditors, and their respective stakeholders.
how it works
First, official creditors and the IMF should create and finance a “last resort” strategic buyer that can buy non-performing (expensive) loans from corporate bondholders at a discount. The buyer is now a creditor of the country in crisis and can repackage the debt and sell it to the debtor country on more manageable terms. The end result is that bondholders receive cash for their bonds, and debtor countries benefit from significant debt relief. Additionally, the debtor and its remaining official creditors will benefit from a simplified debt restructuring process.
This concept has precedent. In 1989, as part of the Highly Indebted Poor Countries Initiative, an international effort to address the debt burdens of poor countries at the time, the World Bank Group established a Debt Reduction Facility under which eligible governments could buy back large amounts of their foreign commercial debt. supported. discount. We completed 25 transactions, resolving approximately US$10.3 billion in principal and over US$3.5 billion in interest arrears.
Some individual countries are buying back their own government bonds. In 2009, Ecuador bought back 93% of its default debt at a deep discount. This allowed the government to reduce its outstanding debt by 27% and subsequently boost economic growth.
Unfortunately, countries currently in debt crisis do not have sufficient foreign exchange reserves to pursue such a strategy. Therefore, as a last resort, you should find a “friendly” buyer.
The IMF is well placed to play this role. Its mission is to support countries during financial crises. We also have the resources to fund such facilities. Rich countries can leverage a combination of their own resources, including gold reserves, and donor funding, such as part of the IMF’s US$100 billion in special drawing rights (SDRs), its own reserve currency, to regenerate for development. promised to allocate. the purpose.
For example, such a system would have enabled Kenya to refinance its debt at the current SDR rate of 3.75% per annum, rather than the 10.375% rate it pays in financial markets.
It is notable that the 47 low-income countries identified as needing debt relief have only US$60 billion in outstanding debt to corporate bondholders. Our proposed buyer of last resort will help reduce the burden on these countries to a manageable level.
Second, we suggest that both debtors and creditors should follow a set of common principles, based on internationally recognized debt restructuring norms and standards:
guiding principles
1. Guiding norms: Sovereign debt restructuring should be guided by six norms: credibility, responsibility, integrity, optimality, comprehensiveness, and effectiveness.
Optimality means that the negotiating parties offer each party the best combination of economic, financial, environmental, social, and human considerations, taking into account the circumstances under negotiation and their respective rights, obligations, and responsibilities. It means you should aim to achieve results. Rights and Governance Interests.
2. Transparency: All stakeholders should have access to the information they need to make informed decisions.
3. Due Diligence: A sovereign debtor and its creditors must each conduct appropriate due diligence before completing a sovereign debt restructuring process.
4. Assessing optimal outcomes: Parties should publicly disclose why they expect the restructuring agreement to provide optimal outcomes.
5. Monitoring: There should be a reliable mechanism to monitor the implementation of the restructuring agreement.
6. Comparability among creditors: All creditors should make equal contributions to debt restructuring.
7. Fair burden-sharing: The burden of restructuring should be distributed equitably between the negotiating parties.
8. Maintaining market access: Processes should be designed to facilitate future market access for borrowers at affordable interest rates.
The G20’s current efforts to address the silent debt crisis are failing. These contribute to the high likelihood that low-income countries in Africa and other parts of the Global South will be unable to offer all their residents the possibility of living a life of dignity and opportunity.
