WASHINGTON: World financial leaders are pushing to overhaul a system for sovereign debt restructurings that has left poor countries locked out of capital markets as China’s emergence as a key player upends traditional negotiations.
How to fix the so-called common framework initiative, hatched during the pandemic to help poor countries rework their debt, was among the top issues debated during the International Monetary Fund’s (IMF) spring meetings in Washington.
Leaders from the IMF and Group-of-20 countries, which started and oversee the process, have made some fixes aimed at speeding up debt restructurings, which have left countries stranded in default for years amid protracted negotiations.
Zambia, considered a “guinea pig” for the new model, only recently struck a deal with creditors, three-and-a-half years after it defaulted.
Ghana and Ethiopia, which stopped paying bondholders in late 2022 and 2023, respectively, are still negotiating.
“The last four years have been nothing short of a debt disaster,” said United Nations secretary-general Antonio Guterres.
He railed against the system’s perceived ineffectiveness, citing the example of Zambia, and said: “This is more than counter-productive. This is immoral. This is wrong. This must change.”
While defaults are expected to subside and risk premium for high yield countries has plunged, emerging market (EM) governments – excluding China – face an estimated US$421bil in debt payments this year.
That, combined with the risk aversion roiling markets amid tensions in the Middle East and the US Federal Reserve’s higher-for-longer stance, is adding to the urgency to find a fix.
“Ultimately, the ones paying the real price of prolongated default periods are the people of these countries,” said Joe Delvaux, a money manager in London at Amundi SA.
“For investors, the recoveries take longer to materialise, as the defaulted bonds will continue to trade at heavily discounted prices.”
Debt reworking has always been a complicated business that involves deals with the IMF, foreign treasuries and private investors.
Commercial banks and foreign governments, who traditionally held the lion’s share of defaulted debt, organised into the London Club and Paris Club of creditors, respectively, to streamline negotiations.
But now they’re being muscled out of talks by Wall Street and China, who as holders of more than half of defaulted debt have power to reject deals.
The common framework sought to guarantee each creditor group shared the burden evenly – meaning bondholders would take roughly the same losses as, say, Chinese banks.
But each group negotiates separately, with little insight into the deal others are working on, making the process opaque.
“Give me a group of 10 people and two hours and we could come to an agreement,” said David Grigorian, a former IMF and World Bank economist.
“Instead, we have this whole circus of everyone negotiating in different rooms.”
In the case of Zambia, China last year rejected a proposed deal the African nation had reached with bondholders, delaying a resolution until February.
Finance Minister Situmbeko Musokotwane said that the process showed the need to establish clearer timeframes within the framework, but defended the decision to deploy it rather than try to cut bilateral deals with each of its many creditors.
“We have no regrets,” he said in an interview last Tuesday, noting that using the common framework it helped to remove suspicions among lenders that Zambia might cut a better deal for some that left others worse off.
Not everyone agrees.
“The single biggest criticism that we have as creditors is that the comparability of treatment is a joke,” Kevin Daly, a portfolio manager at Abrdn Investments Ltd in London said of the common framework.
Measures announced last Tuesday may mark a turning point in the campaign to incorporate China into the system for restructuring some of more than US$1.1 trillion in debt owed to Beijing by poor countries. — Bloomberg
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