Countries looking to renegotiate their debt are deadlocked: G20 insists governments should treat the private sector the same, and rating agencies say they could declare governments in default if it is private sector debts. Defaulting would increase government borrowing costs and discourage investors.
Low and downgraded
There are fears of political tensions linked to the legislative elections of June 2021. These include border disputes with Sudan, in particular over the Grand Ethiopian Renaissance dam, and the risk of a resurgence of the conflict in Tigray.
But it was Addis Ababa’s decision, announced on January 29, to use the common framework developed by the G20 to negotiate its debt that prompted rating agency S&P Global to downgrade Ethiopia by B to B- February 12.
The US agency even changed its pre-established schedule – according to which it had only planned to look into Ethiopia’s case on March 26. However, the sovereign rating business is highly regulated and agencies can only depart from their program in “limited circumstances”.
Are countries obliged to seek agreements with the private sector?
S&P Global may not stop there. The agency has placed the country’s new rating under review and warns that it will be changed to SD (selective default) if the country’s commercial debt is renegotiated or if the country does not appear willing or unable to meet its next private deadlines. In other words, the June 11 meeting focused on the single Ethiopian Eurobond (which will mature in 2024) will be closely scrutinized by analysts.
Despite the tough negotiations carried out in November 2020 by the G20 to ensure that the common renegotiation framework includes an offer “at least as favorable” from private creditors as that which would be proposed by public creditors, the rating agencies still doubt whether the real involvement of the private sector in the process.
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At issue are the terms used in the text, which stipulate that stakeholders are “obliged to seek” such an agreement with their private lenders. “It is not known whether they will be forced to do this,” S&P said.
Maturity deferral or rate cut: a typical default
Moody’s has the same doubts, having neither downgraded nor even placed Addis Ababa’s rating (B2, with a negative outlook) on watch following its statements at the end of January.
According to the agency’s February 8 press release, even if the semantic change brought about by the G20’s establishment of a debt moratorium – in which private lenders have been unsuccessfully “called” to participate – suggests a “Increased risk of loss” for private sector creditors. , it seems “unlikely” that the situation has in fact changed significantly, with the private sector holding its own.
“The Paris Club indicates that the stipulation requiring comparable treatment by other creditors may be waived in certain circumstances, especially when the debt represents only a small proportion of the country’s indebtedness. In Ethiopia’s case, however, it is the reshaping of official bilateral debt that will have the greatest impact on overall debt sustainability, ”says rating agency Fitch. He nonetheless downgraded Ethiopia’s rating from B to CCC on February 9, as he says there is a real risk to private lenders.
The three agencies agree on one point. If the private sector does get involved, whether it’s extending maturities or lowering interest rates – not to mention outright debt cancellation – they’ll see that as a big deal. default and the downgrade of sovereign ratings will inevitably follow. This is an “obvious” measure, according to Stanislas Zézé, CEO of the pan-African rating agency Bloomfield.
A challenge for the whole continent
“The rule of the game is: we have a debt, we must repay it within the agreed terms and deadlines, whatever the circumstances,” said the Abidjan-based executive, who specifies that “even without an agreement with the private sector , the public sector will always end up signing because, for him, the explanation put forward will justify the default.
“If the Eurobond component of Ethiopia’s external debt is low and its inclusion in the negotiations will not change much in practice, I have a feeling that some G20 members are likely to push Ethiopia to extend its debt relief agreements to the private sector, ”said Charles Robertson, chief economist at Renaissance Capital.
Robertson said that if Ethiopia – which has pledged to protect its private creditors in negotiations – stands firm and avoids penalizing holders of its Eurobond, “investors in all African assets will be reassured and the costs borrowing for the continent will likely be lower. “The economist cites the case of Peru, which can borrow at an interest rate of 3% (in dollars) over 100 years. African countries, on the other hand, struggle to reach 5% for long-term bonds.