With Virus Crisis Receding, Poor-Nation Debt Relief Stalls
A debt-relief initiative for poor nations is losing momentum as credit premiums narrow and lenders balk at the complexities of a concerted halt in payments.
Private creditors won’t rush to join a G-20 led effort to ease debt burdens, while borrowers may also be wary of joining the plan as their economies heal after the coronavirus-led selloff, potentially improving market access for issuers.
Defaults may still pick up in the next 12 months, but will likely stay below levels that prompt a capital exodus from emerging markets. Small nations that are in difficulty will be left to negotiate terms on their own, according to Gabriele Foa, a London-based money manager at Algebris U.K. Ltd.
“If creditors weren’t jumping on the relief bandwagon in March when things looked worse, they are unlikely to do it now,” said Foa, who helps manage the Algebris Macro Credit Fund, which has outperformed 95% of peers in the last year. “Some restructurings will need to happen, but the way things are shaping up it’s going to be on a case-by-case basis.”
For some, the process has already started. Angola, Africa’s second-biggest oil producer, said it’s in talks with some of its crude-importing partners to reprofile its debt. Zambia appointed Lazard Freres to advise it on restructuring external liabilities.
Emerging-market dollar bonds handed investors a 5.8% return in May, according to a Bloomberg Barclays index, the best performance since December 2008. Stimulus engines revving up across the developed world have helped erase more than half the extra premium demanded since the start of the crisis.
“At the end of the day, the biggest help the U.S. is giving emerging markets is quantitative easing,” Foa said. “Not everyone is back on the market, but the speed with which a few issuers have regained market access has been very impressive.”
That’s helping to tip the balance toward waiting for a further recovery by emerging-market governments, instead of making a call for immediate help. Bondholders, some of whom have organized a group to represent them in talks, would also be in a better position should the relief initiative stall.
If financial assistance were to have an effect in easing the crisis, it would have to be concluded soon, sovereign-debt experts including former lawyer Lee Buchheit said in an op-ed published on the Center for Economic Policy Research website. A plan that calls for months of negotiations between debtors and creditors would be “pointless,” they said, and would risk harsher losses for countries and creditors.
“The debt standstill experience may have significant lessons for the next phase of this process — the likely need in 2021 for full scale debt restructurings by a number of emerging market countries,” Buchheit and his colleagues wrote. “Achieving this goal with commercial creditors will inevitably require more than a simple appeal to the better angels of their natures.”
©2020 Bloomberg L.P.