Debt Relief: Which Countries Are Most Vulnerable?
Developing country sovereign debt investors come under increasing pressure to postpone repayments and begin restructuring negotiations as the economic and health crisis triggered by the coronavirus, as well as the flow of money from emerging markets , are leading countries towards a cash flow crisis.
The G20 group of major developed and developing countries urged private investors to join their suspension of refunds on the bilateral public debt of 73 of the poorest countries – but the richest countries will also seek help. According to IMF Managing Director Kristalina Georgieva, capital outflows from emerging markets have exceeded $ 100 billion and the fund has received more than 100 requests for aid from struggling countries.
Mrs Georgieva said last week that “good progress is being made with private creditors so that they can join voluntarily on the basis of a standardized approach. . . there is therefore no risk of moral hazard if others win [because] some [are] Do the right thing “.
Major investors agree that the private sector should be involved.
Richard House, Head of Emerging Market Debt at Allianz Global Investors, said “it will be difficult for some G20 members to digest if they grant a debt suspension this year. [on official bilateral repayments] and the money is used to pay off private bondholders instead of spending on health systems ”.
Left-wing populist President Alberto Fernández has repeatedly blamed his predecessor for accumulating more than $ 300 billion in debt that he insists Argentina cannot pay. Its priority is to conserve scarce resources for social and health programs.
The South American country has proposed a restructuring deal on $ 65 billion in foreign debt owed to private sector creditors; the deadline for acceptance is Friday.
But, he argued, “they should have made it a condition of the whole package. Trying to get bondholders to do it voluntarily just won’t work. No one will volunteer if they think they are the only one ”.
Adam Wolfe of Absolute Strategy Research, a London-based consulting firm, warned investors in a recent report to prepare for “a wave of defaults in emerging markets.”
Ruled by revolutionary socialists for 20 years, the economy has collapsed, hyperinflation is rampant, and increasingly stringent US sanctions are being imposed to remove President Nicolás Maduro from power.
One of the least prepared countries in the world to deal with a pandemic, Venezuela requested $ 5 billion in IMF aid at the start of the crisis, but was pushed back. The fund said it could not lend due to lack of clarity on the government’s legitimacy.
U.S. sanctions prohibit any American from negotiating Venezuelan debt, preventing private sector creditors from restructuring the country’s $ 150 billion in outstanding foreign debt.
He estimated that as many as 37 percent of bonds in JPMorgan’s benchmark emerging markets index, EMBI, will default over the next 12 months.
But Mr House said bonds issued by the 73 countries covered by the G20 deal only made up a relatively small part of the index, comprising around 8%, meaning that the agreement of a statu quo for these countries would not be ruinous for emerging market debt as a whole. .
Lebanon was already grappling with its worst economic crisis in years before the Covid-19 crisis. It defaulted on $ 1.2 billion in foreign currency bonds in March, has debts of over 150% of GDP and a dollar parity that economists believe it can no longer sustain.
As part of a restructuring plan, Beirut hopes bondholders will agree to a haircut. Lebanon has previously sought support from Western and regional powers, but donors, increasingly frustrated by the lack of reforms and the country’s political dysfunction, have been reluctant to find funding.
“I think the emerging markets asset class can move from there, as long as it’s done in a coordinated fashion,” he said.
But it is not easy. Even among poor countries, whose external debts are mainly contracted with foreign governments and multilateral lenders, about a third of the debt service owed this year is to the private sector, split roughly evenly between repayments to commercial banks and bondholders – and for large emerging economies, bond markets play a much more important role.
Persuading bondholders to reduce their investments will not be easy. Major fund managers have insisted that any transaction be done on a case-by-case basis, depending on the situation in each debtor country.
“Would we be in favor? You can’t answer this question on a conceptual level, ”said an asset manager involved in the bondholder discussions, who asked not to be named given the sensitivity of the issue.
Jordan, an important Western ally, benefits from the goodwill of donors, but also faces serious financial difficulties. According to the IMF, its total external debt is expected to exceed 87% of GDP this year.
The fund has already provided a $ 1.3 billion loan facility, but Jordan is not eligible for the G20 debt moratorium. With tourism – a vital source of foreign exchange and jobs – frozen, Jordan is expected to need more support.
“We should look at where each country is and its capacity to repay its debts. The process can take a long time. “
Since the start of the Covid-19 epidemic, analysts have been looking at the national accounts of debtor countries to determine which are most at risk of debt distress; some are more likely to inspire sympathy than others.
Iran suffers a triple blow from crippling US sanctions, Covid-19 and collapsing oil prices.
After four decades of strained relations with the West, he has little external debt but has appealed to the IMF for a $ 5 billion loan – seen as his very first request from the fund. Iranian officials have expressed concerns that the Trump administration will try to block any support program.
Few sovereign debtors garner as little sympathy from creditors as Argentina, which was sliding to a ninth default amid economic chaos even before the coronavirus crisis.
Its poor borrowing record and reputation for hostility towards creditors set an example that other debtor countries will want to avoid.
Zambia faces an external debt burden of $ 11 billion which is widely regarded as one of the most precarious of emerging markets.
Africa’s second-largest copper producer is even more at risk after falling metal prices, but President Edgar Lungu and his ruling Patriotic Front have an abrasive relationship with the IMF and prefer to deal with Chinese lenders, who must 3 billions of dollars. Chinese loans have helped to keep infrastructure pledges while the terms attached to IMF loans are seen as more onerous.
“It is suspected that they want to do anything and everything they can to hang on to next year’s election, and hope the Chinese will come to the rescue,” said Bradford Machila, former cabinet minister. “Their greatest concern is the conditions [IMF lending] would come with. But they have less and less of an option to do other things. “
“The IMF and the World Bank are very focused on low income countries and Argentina is unlikely to garner much sympathy as a higher income country,” said William Jackson, chief emerging markets economist at Capital Economics in London.
“There must be tremendous pressure to increase health care spending, but they haven’t been in favor of the way they’ve presented the [debt restructuring] to offer.”
Zimbabwe lacks access to international funding even as hospitals are in dire straits and commodity prices skyrocket.
Arrears owed by President Emmerson Mnangagwa’s government to international financial institutions remain unpaid, preventing the IMF from lending. The fund had overseen a reform program that could have led to an agreement on arrears clearance, but reforms were derailed by evidence of systemic corruption.
Minister of the Economy Martin Guzmán argued the country does not have the means to pay more and has offered “in good faith, a redistribution of our debt commitments”. But some investors are pissed off; one said his attitude reflected his experience in academia. “The minister is extremely stubborn and has no real market experience,” said one financier. “For him, it is a question of showing that his theory is correct, then of returning to [university]. “
Kevin Daly, portfolio manager at Aberdeen Standard Investments, compared Argentina’s “antagonistic” attitude towards bondholders to Ecuador’s more consensual approach.
South Africa has contacted the IMF as part of a 500 billion rand ($ 26 billion) pandemic stimulus package – ending a long stigma attached to using the fund for help .
The ruling African National Congress has long been suspicious of the terms attached to IMF lending, even as the cost of borrowing in South Africa has risen.
President Cyril Ramaphosa stressed that IMF conditions for financing the pandemic will be relatively light, but South Africa is yet to issue large amounts of bonds this year. The issue will be difficult for investors to absorb given the fragility of emerging markets and the recent downgrading of South Africa to junk by major rating agencies, analysts believe.
“The problem with Argentina is that the new government has come in and blamed everything on the previous administration and the IMF,” he said.
While during the negotiation of a recent payment freeze, the Ecuadorian government “approached all its creditors to seek a solution on friendly terms, and obtained overwhelming support”.
Reporting by Jonathan Wheatley, Tommy Stubbington, Michael Stott, Andrew England and Joseph Cotterill