Facing Tsunami of Defaults, G-20 Agrees to Step Up Debt Help
G-20 Backs New Rules To Deepen Debt Help to Poor Hit by Virus
(Bloomberg) -- The world’s top economies backed a new plan for restructuring the debt of poor countries hit by the Covid-19 pandemic to avert a messy wave of defaults.
The common framework for debt treatment was endorsed by the Group of 20 -- which includes China -- and the Paris Club, a grouping of mostly western government creditors, according to a G-20 statement after an extraordinary meeting of its finance ministers and central bankers.
It goes beyond the broad Debt Service Suspension Initiative, or DSSI, from earlier this year, and will deal with issues on a case-by-case basis. It’s an acknowledgment that the economic and financial damage from the novel coronavirus will linger for some time and could see more countries run into debt difficulty well into 2021.
The new set of principles, inspired by those of the Paris Club, aims to bolster the participation of China and private lenders in debt relief to more than 70 of the world’s poorest countries.
“For the first time, all the main bilateral creditors, members or non-members of the Paris Club, will coordinate the debt treatment,” said French Finance Minister Bruno Le Maire. “It will bring more transparency in the debt-relief process and involve private creditors, who will need to commit to at least comparable terms.”
While the framework currently applies only to the DSSI-eligible countries, among the world’s poorest, the U.S. is very open to extending it to middle-income nations and small island-states, a senior American official said on Friday. Such a move doesn’t yet have agreement from all countries in the G-20, the official said.
Over the last decade, China and private commercial creditors have become the biggest creditors for countries across the developing world, many of which are now reeling from the pandemic. In Zambia, bondholders and Chinese lenders blamed each other for pushing the African country to the brink of default.
Under the new rules, the need for restructuring will be based on a debt-sustainability analysis by the International Monetary Fund and World Bank. Other official creditors will also assess the need for an overhaul requested by debtor countries.
In a bid to get private creditors to participate, debtors will need to ink a memorandum of understanding with creditors that requires them to seek equal treatment from all their official and private lenders.
“The framework puts China in the center of upcoming debt restructurings, but addresses some of the Chinese concerns of equal treatment of creditors and private-sector participation in any debt relief,” said Mark Bohlund, a senior credit research analyst with REDD Intelligence.
World Bank President David Malpass has complained that neither China nor bondholders have provided enough debt relief as part of the DSSI, which runs through the first half of 2021, with the possibility for another six-month extension.
Not Enough
The new framework still may not be enough to get them both to do more this time around.
Some western governments have expressed doubts that China will fully embrace a common strategy out of fear of losing its leverage in debt renegotiations. China is the world’s largest official creditor and was owed almost 60% of the bilateral debt that the poorest nations were due to repay this year.
Without a mechanism that pushes commercial creditors to take part in future renegotiations, the G-20 deal is doomed to fail, said Tim Jones, head of policy at Jubilee Debt Campaign, a group that advocates for debt cancellation.
“This announcement falls far short of what is needed to tackle the wave of debt crises in poorer countries” Jones said in a statement.
Middle-income countries are increasingly coming under massive debt pressure, Ana Arendar, the head of the inequality campaign at charity group Oxfam GB.
“Without cancellation of public and private debt, we could see developing countries falling into default like dominoes,” Arendar said. “ Already many cannot afford doctors and nurses, with precarious chances of a quick recovery from the pandemic.”
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