Resolving Global Debt: An Urgent Collective Action Cause
IMF News, October 1, 2020
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- Published: October 1, 2020
Pre-existing debt vulnerabilities and recent shifts
- Total nonfinancial debt amounted to US$ 152 trillion, or 225 percent of world GDP; public debt had increased by 15 percentage points of GDP between 2000 and 2015.
- As the pandemic raged throughout the world, debt turned out to be a very serious pre-existing condition.
- All countries face the same combination: higher spending to fight the disease and protect people; and lower revenue because of the recession triggered by containment measures.
- Compared to pre-pandemic expectations, median debt in 2021 is projected to be up by about 17 percent of GDP in advanced economies; 12 percent in emerging economies; and 8 percent in low-income-countries.
- Low-Income Countries are particularly vulnerable: about half of them were already in, or at high risk of, debt distress prior to the crisis.
Global support to date and its scale
- Very low interest rates and massive monetary policy support: central banks lowered interest rates and supplied liquidity; swap lines helped many emerging countries maintain market access. Latest estimation is that these measures add up to US$ 7.3 trillion.
- Extraordinary direct financial support:
- IMF emergency financing to 76 countries.
- Debt service relief through the G20 Debt Service Suspension Initiative (DSSI) to 44 countries.
- IMF’s Catastrophe Containment and Relief Trust to 29 members.
- This support has bought the world time; a pandemic-induced systemic debt crisis cannot be ruled out and the longer the problem is postponed, the worse it will become.
Current international debt architecture: achievements and gaps
- Achievements
- The existing architecture worked relatively well before this crisis compared to past crises (e.g., Latin America in the 1980s).
- Enhanced Collective Action Clauses (CACs) and related mechanisms in bonded debt have facilitated faster and more pre-emptive restructurings with higher creditor participation. Since 2014, over a dozen such restructurings have happened (Argentina and Ecuador are recent examples).
- Gaps and frictions
- A large stock of outstanding international sovereign bonds still doesn’t have enhanced CACs.
- Non-bonded debt typically does not include majority restructuring provisions.
- A growing share of debt is guaranteed by collateral, making it harder to restructure; these characteristics are increasingly prevalent in Low-Income Countries.
- Official bilateral debt: significant amounts are owed to creditors outside the Paris Club and don’t follow its procedures or have any common restructuring framework.
- Single-country creditor engagement now often requires engaging several agencies within that creditor country.
- Lack of debt transparency creates information asymmetries and inter-creditor equity concerns.
Immediate policy proposals and priorities
- Extend the DSSI, temporary by design, ideally for another 12 months; without extension, recipient countries will be forced to resume debt service at the expense of fighting the pandemic and its economic fallout.
- Encourage prompt restructuring where debt is unsustainable; delaying restructuring increases economic and human costs.
- Link DSSI extension to incentives for prompt action on unsustainable debt, for example by tying extension duration to an IMF program designed to reduce vulnerabilities, including restructuring if needed.
Architecture fixes recommended
- Promote wider adoption of enhanced collective action clauses in bonds and similar provisions in non-bonded debt.
- Increase debt transparency to address inter-creditor equity concerns and information asymmetries.
- Official bilateral creditors, whether Paris Club members or not, should agree on a common restructuring framework.
The IMF’s proposed role
- Country-level actions:
- Continue to support members with financing, policy advice, and capacity development to strengthen debt management and transparency.
- Remain committed to providing debt service relief to the most vulnerable members.
- Global-level actions:
- Support the DSSI extension while encouraging beneficiaries to tackle debt problems promptly.
- Facilitate debtor/creditor coordination and restructuring by providing debt sustainability analysis to determine the financing and/or relief necessary to restore sustainability.
- Condition IMF financial support on high creditor participation.
- Continue to support the G20 in their financing and debt-relief efforts with co-financing, data and analysis.
Key messages and urgency
- The current situation is not the 1980s: better instruments and legal provisions exist, but the consequences of past failures (a decade of sluggish growth, low competitiveness and growing inequality) remain a cautionary tale.
- To avoid repeating history, mounting debt vulnerabilities must be addressed now through better architecture and urgent collective action by all stakeholders.
- “The world might be able to evade this responsibility today but cannot escape it tomorrow. Let’s not wait.”
Opening Remarks by IMF First Deputy Managing Director Geoffrey Okamoto, Peterson Institute for International Economics Conference, Washington, D.C., October 1, 2020.