IMF Warns Poorest Nations Will Default Without Debt Relief

(Bloomberg) -- The head of the International Monetary Fund called on private creditors to join the Group of 20 in providing debt relief for the world’s poorest nations, saying that the alternative to suspension and restructuring is defaults.

A debt-service suspension would provide time for restructuring debt on a case-by-case basis in countries where debt sustainability needs to be restored, Managing Director Kristalina Georgieva said in a webcast with the U.S. Chamber of Commerce Tuesday.

Private investors last month said they may offer low-income countries cash to ease the burden of $140 billion in debt payments due this year to help them fight the coronavirus pandemic. Still, the voluntary nature of the proposal may mean it falls short of easing the unsustainable burden carried by some developing nations, according to Jubilee Debt Campaign, an advocacy group.

Failure to provide relief and restructuring “would lead to inevitably a much worse option, which is disorderly defaults,” Georgieva said. “We can prevent that.”

Reserve Assets

In a separate event, Georgieva’s first deputy, Geoffrey Okamoto, said that the IMF is looking at ways to mobilize existing reserve assets rather than create new ones to help countries deal with the economic fallout of the global pandemic.

The fund is doing “quite a bit” of internal work to figure out how to use existing special drawing rights, or SDRs, to replicate the impact of creating more of them, Okamoto said on a conference call. A proposed $500 billion SDR allocation was blocked in April by the IMF’s biggest shareholder, the U.S.

“While I think myself and others would be interested in a general SDR allocation, we are exploring every available option to make sure that we effectively get the benefit of an SDR allocation but with the existing stock that we currently have,” Okamoto said. “There’s quite a bit of internal work being done on this at the moment. I don’t want to preview too much,“ he added.

Georgieva had previously said that the IMF wants to find ways to get SDRs from rich countries that don’t need them to poorer nations that do.

The most likely way to facilitate the redistribution of reserve assets would be through a new or existing trust mechanism, said Douglas Rediker, a senior fellow at the Brookings Institution and former U.S. executive director at the Fund. For example, the IMF has a Catastrophe Containment and Relief Trust, funded through contributions from by rich nations, that it uses to provide grants for debt relief to poor borrowers.

U.S. Treasury Secretary Steven Mnuchin said in April that the Trump administration opposed the plan to create more reserve assets because they are allotted to countries in proportion to their IMF voting share. This means 70% would go to G-20 countries that don’t need the help and just 3% to the poorest developing nations.

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