Some high-profile sovereign creditors are signalling a tentative willingness to help poorer countries with debt relief during the coronavirus pandemic – but many also caution that it won’t be as simple as it sounds.
Last week’s agreement by G20 governments to freeze as many as 77 poorer nations’ debt payments for the rest of the year came with a warning from the head of the World Bank that private investors shouldn’t expect a “free ride”.
All are fully aware of the problem. Defaults are already starting and across Africa, where the World Health Organisation is warning of up to 10 million coronavirus cases within six months, countries are facing a combined $44 billion debt-servicing bill this year alone.
Charity groups estimate too that a wider group of 121 low- and middle-income governments spent more last year servicing their external debts than on their public health systems, now at breaking point, making the moral case for relief impossible to ignore.
“There is clearly a willingness from (private sector) creditors to be constructive, to give some breathing room,” said distressed debt veteran Hans Humes of Greylock Capital.
Humes was part of Heavily Indebted Poor Country initiatives in the past, and he is now involved in an Institute of International Finance (IIF) group aiming to coordinate the private sector’s support effort.
“The economic contraction has been breathtaking,” he added, not to mention the fact that countries needed to prioritise their resources to save lives.
Beyond the goodwill and understanding though, there are serious complications.
David Loevinger, managing director of the Emerging Markets Group at fund manager TCW, said debt relief ultimately amounts to a debt restructuring. Restructurings are complex and typically take far longer than stricken countries now have.
As a result, the so-called International Development Association (IDA) countries in focus will have to decide whether they keep paying their bonds or stop and spend the money on ventilators and medicines instead.
“For many IDA countries, not servicing their debt will be the right decision and as a creditor we understand that and are happy to work with countries,” Loevinger said during an IIF web-panel.
“But that will be considered a default by the credit rating agencies and that is an issue we are going to have to deal with.”
GOODWILL, BAD RESULT?
The IIF estimates that the total amount of external debt in the countries in the G20 Debt Service Suspension Initiative has more than doubled since 2010 to over $750 billion. Debt now averages more than 47% of GDP in these countries, too — a high reading considering their stage of development.
TCW’s Loevinger cautioned that defaults could leave countries vulnerable to attack from litigious vulture funds. In the past there have been examples of some funds going after governments’ assets or property.
Campaign groups have urged that the New York and London laws that govern most sovereign debt contracts be temporarily changed to shield governments from those risks, but even that could store up problems.
Private investors are already concerned that emergency International Monetary Fund loans would push up countries’ debt levels even further. They will also get priority when it comes to repayment in future, leaving less money to service other bonds.
Suspending traditional legal rights would also raise questions about what happens in the next crisis, whether it be another health epidemic or the locust plagues that have recently savaged East Africa, the Middle East and South Asia.
Nick Eisinger, principal for fixed income emerging markets at Vanguard, said the risk of pushing up borrowing costs meant it was very hard for the G20 to “compel” private creditors to participate in any debt relief.
Even the IIF, which is spearheading efforts to coordinate private investor involvement, says any relief from the sector will need to be voluntary and only considered for countries who formally request it.
“At the moment, it will would be a gesture of goodwill and not legally binding. There will also be plenty of countries not wanting to jeopardise their Eurobond market access too,” Eisinger said.
He estimated that it might not make a huge amount of difference, either. Eurobond coupon repayments for the Sub-Saharan African countries this year add up to around $2.5 billion in 2020, rising to about $3 billion for next year, but so called principal payments only add up to a few hundred million.
“To me, if there’s an insistence on getting private creditors involved, it will do a lot more damage than support as it will disrupt meaningful sources of private funding”.
Greylock’s Humes had an additional warning that countries shouldn’t try to use it as a quick-fix for their finances.
“Countries trying to use this as a solution for longer-term problems is not constructive”.