Ethiopia Will Approach Private Creditors Only as Last Resort

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Ethiopia plans to only approach private creditors as part of its debt-restructuring efforts if it runs out of other options. Yields on the nation’s Eurobonds plunged by the most in eight months.

“The debt treatment will be carried out on a case-by-case basis and under a fair burden-sharing principle,” Brook Taye, a senior adviser at the Finance Ministry, said by text message. “This does not put private creditors at the center, but as kind of a last resort, or maybe even not a resort, so long as the debt treatment can accomplish the sustainability it is set out to achieve.”

Yields on the Horn of African country’s $1 billion of Eurobonds due in December 2024 fell for the first time in four days, sending prices higher. Rates dropped 65 basis points to 8.49% by 12:47 p.m. in London. Yields on the notes soared to nine-month highs after the government’s announcement on Jan. 29 that it wants to restructure external debt under a Group of 20 program.

While the Finance Ministry said earlier this month it may seek talks with private lenders such as bondholders or commercial banks after negotiations with government and public-sector agencies are completed, many investors have continued to offload the securities amid the uncertainty of the potential outcome.

Ethiopia, like other African nations, is looking to offset the fallout from the coronavirus pandemic on its economy. However, its position is exacerbated by fighting in the northern Tigray region and a border dispute with Sudan that’s disrupting trade flows.

The International Monetary Fund is in the process of updating its public debt sustainability assessment with Ethiopian finance ministry officials, while the government prepares for upcoming discussions with official creditors through the G-20 Common Framework for Debt Treatments.

The relief provided by private lenders could vary and may not lead to a reduction in money owed to them, according to the chair of the Paris Club, an informal grouping of mostly rich western countries coordinating the G-20 plan.

Crisis Aversion

The framework is the second phase of the Debt Service Suspension Initiative to avert a crisis in developing countries unable to cope with the effects of the pandemic. Chad and Zambia have also applied to join the arrangement, which is open to more than 70 poor nations.

The common-framework program aims to bring creditors into an agreement to rework the debt of countries in danger of defaulting. Once reworked, debtors are committed to seek similar terms of the resulting bilateral restructuring with private creditors.

Fitch Ratings downgraded Ethiopia’s debt on Tuesday, saying that relief raises the risk of default and that past Paris Club agreements show comparable treatment among creditors is not always enforced.

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