Debt relief is not as simple as it sounds

Some high-profile sovereign creditors are signalling a tentative willingness to help poor countries with debt relief during the Covid-19 coronavirus pandemic, but many caution that it won’t be as simple as it sounds.

Last week’s agreement by G20 governments to freeze as many as 77 poor 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.

Defaults are already starting and, across Africa, where the World Health Organisation is warning of up to 10 million Covid-19 cases within six months, countries are facing a combined $44 billion (R837.4 billion) debt servicing bill this year alone.

Charity groups estimate that a wider group of 121 low- and middle-income governments last year spent more servicing their external debts than on their public health systems, which are 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 debt veteran Hans Humes of Greylock Capital.

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Humes was part of initiatives pertaining to heavily indebted poor countries in the past, and he is now involved with an Institute of International Finance (IIF) group aiming to coordinate the private sector’s support effort.

“The economic contraction has been breathtaking,” he said, adding that countries needed to prioritise their resources to save lives.

However, beyond the goodwill and understanding, there are serious complications.

David Loevinger, managing director of the Emerging Markets Group at fund manager TCW, said debt relief ultimately amounts to debt restructuring. Restructurings are complex and typically take far longer to process than stricken countries currently have.

As a result, the 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 for the poor countries in the G20 debt service suspension initiative has more than doubled since 2010, to more than $750 billion. Debt now averages more than 47% of GDP in these countries, too high a reading considering their stage of development.

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 government assets and properties.

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 will push up poor countries’ debt levels even further. They will also get priority when it comes to repayment in the future, leaving less money to service other bonds.

Suspending traditional legal rights would also raise questions about what happens in the next crisis, be it another health epidemic or the locust plagues that have recently ravaged East Africa, the Middle East and South Asia.

Nick Eisinger, principal of fixed income for emerging markets at Vanguard, said the risk of pushing up borrowing costs meant it was 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 that 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,” Eisinger said.

He estimated that it might not make a large difference either. Eurobond coupon repayments for Sub-Saharan African countries this year add up to around $2.5 billion, rising to about $3 billion for next year, but principal payments only add up to a few hundred million.

“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.”

Humes had additional counsel for countries planning to use debt relief as a quick-fix for their finances.

“Trying to use this as a solution for longer-term problems is not constructive,” he warned. – Reuters

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