Paola Subacchi | Good But Incomplete Debt Relief Begins Business

A global collapse in economic activity during the COVID-19 pandemic has dramatically increased the risk of debt distress in many countries, pushing the poorest to the brink.

In response, various international organizations have unveiled a number of initiatives to prevent circumstances requiring between an adequate response to the public health crisis and the servicing of existing debts.

Most notably, the G20 has put in place a debt service suspension initiative, DSSI, which allows the world’s poorest countries to suspend official bilateral debt service payments until next year. And this month, G20 leaders adopted a new common framework to address sovereign debt restructuring needs on a case-by-case basis.

For poorer countries struggling with the pandemic, debt not only limits their fiscal space to respond to the crisis, but also hinders future development. Faced with the sudden costs of the COVID-19 crisis, many countries that are already struggling to service existing debt have needed new financing, only to find it too difficult or too expensive to borrow more .

And even if they do, the additional debt burden will weigh on them for years, limiting their prospects for growth and development.

Far from implicating a few unhappy countries at the margin, the current sovereign debt distress poses a potentially systemic risk. Since 2014, total sovereign debt as a percentage of GDP has not only increased substantially; it has also become more fragmented, owing to the use of more diversified debt instruments among a wider range of creditors.

In view of these circumstances, the global financial safety net urgently needs to be widened beyond the support currently offered by international financial institutions such as the International Monetary Fund, the IMF and the World Bank. To this end, the DSSI has taken the first step by suspending payments of principal and interest on debt maturing between May 1, 2020 and June 30, 2021 – having been extended from December 31, 2020 – thereby expanding the safety net from at least 77 developing countries.

But while the DSSI offers some respite, it also only speeds up debt repayment, leaving deferred payments to be repaid in full between 2022 and 2024. Debtor countries will therefore have to make up the difference with larger repayments. , and may even need to borrow more to service their frozen debt, in addition to any other debt incurred during the COVID-19 crisis.

The 46 countries that have requested debt suspension so far will eventually have to cover $ 5.3 billion in deferred payments, in addition to the $ 71.54 billion in pre-existing commitments; and any other debt incurred since the COVID-19 outbreak will add to the burden.

While the latest G20 debt initiative misses the mark in many ways (especially when it comes to addressing debtor-creditor asymmetries), it has at least enshrined a common framework for debt reduction in the pipeline. the international agenda. The new initiative has two distinct merits.

First, by allowing for a case-by-case approach, it addresses a specific concern raised by private sector creditors, a key group that was not included in the DSSI.

Second, the new framework incorporates China, after overcoming some initial resistance stemming from the definition of a state bank (which raised concerns that the Development Bank of China and the Export-Import Bank of China themselves exposed to debt restructuring). Since China holds around 63 percent of total debt to G20 member states, its participation is critical to the initiative’s success.

The common framework is an important first step in the right direction. But the G20 cannot stop there; the initiative should be extended to a common sovereign debt restructuring program. Sovereign debt is the only category of debt without a bankruptcy mechanism. While individuals and businesses can file for bankruptcy, a country cannot.

So far, the international community has relied on a contractual approach to prevent and resolve sovereign debt problems. But this method often involves deep asymmetries between the treatment of debtors and creditors, resulting in an inequitable distribution of losses among different types of creditors. We need a multilateral agency specifically tasked with coordinating creditors, sharing information and reducing the scope of information arbitration.

In addition, the new framework should help debtor countries throughout the restructuring process. For example, as the IMF has already suggested, the G20 should task international financial institutions with providing limited financing in order to give debtors a negotiating space to secure a lasting debt restructuring deal.

To tie it all together, the G20 should build on its Sustainable Financing Guidelines to promote responsible lending and borrowing alongside orderly and multilateral debt restructuring. It should also promote debt transparency and provide the necessary technical assistance, so that countries can strengthen their debt management capacity before they get into debt distress.

Clear procedures, transparency, oversight and accountability of sovereign debt management are public goods in the broad sense. Everyone deserves to be fully informed of the steps their respective countries take when borrowing internationally, just as they should be aware of their country’s debt obligations and commitments.

A framework that clarifies every step of the process of taking on debt – including the necessary checks and balances – is essential to securing responsible borrowing (and lending) more generally.

Paola Subacchi, professor of international economics at the Queen Mary Global Policy Institute at the University of London, is the most recent author of “The Cost of Free Money” (Yale University Press, 2020).

© Project union, 2020

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