In association with Alvarez & Marsal, Bluebay Asset Management, JP Morgan, PGIM and White & Case.
The event gathered high level private and public sector representatives as well as experts from outside government in a participatory dialogue to discuss the challenges facing emerging market countries in debt distress and to identify solutions for more efficient and effective debt restructuring processes. It encompassed participants from creditor countries and companies alongside low or lower-middle income emerging market countries with high levels of debt. This report provides a summary of the key issues and policy recommendations that emerged during the conference proceedings.
Participants expressed a range of views, and the summary points that follow below, while conveying a ‘sense of the conference’, do not imply any consensus agreement. Some views received more support than others. Where disagreements occurred, they are noted. Section five is a summary of breakout group discussions of three key topics that the participants collectively framed for in depth examination early in the conference proceedings. This section does reflect the large weight of opinion within each of the three breakout groups, but again does not necessarily mean all participants in the groups agreed with every point. Nothing contained in the report should be read as committing any participant or their organisation to a particular course of action.
Public debt stocks and debt-to-GDP ratios are elevated and are expected to grow across all economies, including emerging market and low-income countries (EMs and LICs), exacerbating debt vulnerabilities. A wave of debt crises could be looming; over 50% of Debt Service Suspension Initiative (DSSI) eligible countries are already in debt distress or at high risk of debt distress. In this context, it is vital to strengthen the effectiveness of debt crisis resolution processes and encourage pre-emptive action. At the same time, unlocking new capital flows is urgently needed to meet the pressing financial needs of EMs and LICs for social and infrastructure investment as well as for climate change adaptation and mitigation
Domestic debt relative to GDP has increased significantly. Thus, domestic debt restructurings will become more common in the future, with potentially severe implications for financial stability.
The establishment of the DSSI and, subsequently of the Common Framework (CF) under the auspices of the G20 and of the Paris Club in the wake of the COVID pandemic has represented a significant step forward, signalling the shared commitment to tackle debt sustainability issues despite the increasing diversity of bilateral lenders. Nonetheless, implementation of the CF has been slower than hoped. This can be attributed to a number of reasons, including difficulties in coordination between creditors, as well as domestic challenges in debtor countries.
It is understood that China (which was not represented at this conference), currently the largest bilateral lender, has been voicing concerns involving various aspects of the current debt restructuring architecture. These aspects include the perceived lack of transparency of the debt sustainability assessments underpinning restructuring negotiations, the preferred creditor status of multilaterals, the definition of the restructuring perimeter and comparability of treatment vis-à-vis commercial creditors. Efforts to build and enhance multilateral cooperative solutions to address debt sustainability issues in EMs and LICs should be further promoted, even though fostering trust and collaboration between bilateral creditors is likely to require time.
Debt restructuring processes are hampered by issues of sequencing in the debt treatment provided by different groups of creditors, a perceived lack of transparency and inter-creditor equity concerns. In the view of a substantial number of participants, a particularly controversial element is the IMF’s debt sustainability assessment (DSA), which conditions the restructuring envelope binding both official bilateral creditors and commercial creditors, who are required to provide financing assurances consistent with the DSA prior to the approval of IMF programmes. While some conference participants did not evince concern over the DSA process, those from the private sector in particular perceive a lack of transparency, arbitrariness, and conservativeness of DSAs, exacerbating concerns over inconsistent and inequal treatment.
These concerns could be addressed by involving commercial creditors earlier in restructuring negotiations. Furthermore, the employment of innovative financial instruments could help to bridge the gap between commercial creditors and the IMF DSA regarding expectations of the future economic prospects of borrowing countries.
Case studies of Ukraine, Zambia, Sri Lanka and Ghana each presented individual and unique challenges involved in debt restructuring efforts, collectively illustrating their considerable complexities.
The key take-aways emerging from the conference are the following:
- Despite the increasing diversity of bilateral creditors and the challenges posed by geopolitical tensions, there is scope to continue working on multilateral and cooperative solutions to debt sustainability issues and the financing gap faced by EMs and LICs, following up on the progress already made in the Common Framework.
- There is a need to enhance the voice and agency of borrowing countries throughout debt crisis resolution processes, building at the Global Sovereign Debt Roundtable (GSDR), via both initiatives to build capacity for debt management and by supporting access to financial and legal assistance.
- Pre-emptive crisis response should be encouraged, including through the establishment of regular communication channels and engagement processes with creditors.
- One of the conference breakout groups concluded that inviting the IMF to take on a more active role in obtaining financing assurances from the bilateral creditors who are its shareholders could arguably help reduce delays in the progress of debt restructuring. An alternate view felt that in practice the IMF is very active in seeking financing assurances.
- Several conference participants considered that there should not be any rigid sequencing in the treatment of different sets of financial obligations. Commercial creditors should be encouraged to act promptly and there should be a margin of flexibility in the comparability assessment to incentivise timely action.
- Intercreditor equity concerns could be tackled by enhancing transparency and information sharing regarding both the composition of the borrowing country’s debt profile and the parameters underlying the formulation of the DSA.
The employment of innovative or re-purposed financial instruments in debt restructurings represents an opportunity to ameliorate uncertainties surrounding DSAs and to mobilise new capital flows to meet the financing needs of Ems and LICs.