The Debt Pandemic – IMF F&D

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The COVID-19 pandemic has greatly lengthened the list of developing and emerging market economies in debt distress; for some, a crisis is imminent.
Default rates are rising, and the need for debt restructuring is growing.
Emerging market governments issued $124 billion in hard currency debt during the first six months of 2020, with two-thirds of the borrowing coming in the second quarter.
Remittances from emerging market citizens working in other countries are expected to drop by more than 20 percent this year.
Rising budget pressures have been accompanied by a new wave of sovereign debt downgrades, surpassing peaks during prior crises.
History: a review of 89 default episodes from 1827 to 2003 shows the typical experience to be a sharp rise in borrowing, both external and domestic, in the run-up to default.
Default episodes have taken, on average, seven years to resolve and typically involve multiple restructurings.

The IMF, the World Bank, and other multilaterals acted quickly to provide funding as government revenues collapsed and private capital flows stopped.
G20 creditors granted a debt moratorium to the world’s poorest countries and have encouraged private lenders to follow suit, with little success.
Although official sector loans are theoretically senior to private sector claims, historical experience often shows private creditors extracting outsize shares of repayment.
When private investors retrench, official lenders often step in; official creditors may end up bearing the bulk of losses even when they start with little of the outstanding debt.
Private creditors increasingly use holdout and litigation tactics; as restructurings have declined, an increasing share of them have involved lawsuits.

The riskiest period may still lie ahead: the first wave is not over; experience from the 1918 influenza pandemic suggests the possibility of an even more severe second wave, especially if it takes until mid-2021 (or later) for an effective vaccine to become widely available.
Even in the best-case scenario, international travel will face roadblocks, and uncertainty among consumers and businesses is likely to remain high.
The COVID-19 crisis could, in the worst case, lead to another “lost decade” in development, with long delays in debt resolution.
Businesses in emerging markets have continued to accumulate foreign currency debt; under severe duress, governments may bail out corporate national champions, increasing public liabilities.

First preexisting condition: private creditors are increasingly claiming outsize shares of repayment in restructurings; analysis comparing haircuts taken by official and private creditors raises further doubt about official seniority.
Second preexisting condition: debt crises tend to drag on; delay can lead to repeated restructurings, bargaining for larger official infusions, and “evergreening” of debt by creditors.

More transparency on debt data and debt contracts
- Strengthen transparency of debt statistics (World Bank, IMF, and G20 should insist on this).
- Increase disclosure on China’s bilateral lending where nondisclosure clauses currently obscure a full picture.
- Provide more granular data on private sector creditor exposure, including full disclosure on sovereign bond ownership and credit default swaps.
- Improve domestic accounts: better data on domestic debt, debt owed by state-owned enterprises, and pension burdens.
Realistic economic forecasts that incorporate downside risks
- Adopt realistic growth forecasts to avoid underestimating near-term financing needs and overestimating a country’s capacity to service debt.
- Earlier detection of insolvency and identification of cases needing large write-downs can speed resolution.
New legislation to support orderly sovereign debt restructurings
- National legislation in jurisdictions governing international bonds or payment processing can promote a more level playing field (examples in the text: UK 2010 law for HIPC participants; Belgium 2015 Anti–Vulture Funds Law).
- Legislation could cap amounts reclaimable from defaulted government bonds bought at deep discounts.
- Facilitate majority restructurings to allow a sovereign and a qualified majority of creditors to reach an agreement binding on all creditors subject to the restructuring.

The global pandemic merits a generous response from official and private creditors toward emerging market and developing economies, including preserving the global trading system and helping countries weather debt problems.
It is essential to ensure inter-creditor equity and fair burden sharing, especially between official and private creditors.
The more official aid and soft loans can go toward helping needy citizens—and the less such assistance ends up as debt repayments to uncompromising creditors—the better.

Authors: JEREMY BULOW; CARMEN M. REINHART; KENNETH ROGOFF; CHRISTOPH TREBESCH.

The Debt Pandemic – IMF F&D
- The Debt Pandemic – IMF F&D (Markdown version)
- The Debt Pandemic – IMF F&D (PDF)
Pandemia de deuda por la COVID-19 ● Finanzas y Desarrollo ● Septiembre de 2020
- Pandemia de deuda por la COVID-19 ● Finanzas y Desarrollo ● Septiembre de 2020 (Markdown version)
- Pandemia de deuda por la COVID-19 ● Finanzas y Desarrollo ● Septiembre de 2020 (PDF)
La pandémie de la dette
- La pandémie de la dette (Markdown version)
- La pandémie de la dette (PDF)