In response to the COVID-19 "call to action" from the World Bank and the IMF, the G20 announced a debt service suspension initiative (the "DSSI") on 15 April, supporting an NPV-neutral, time-bound suspension of principal and interest payments for eligible countries that make a formal request for debt relief from their official bilateral creditors, and encouraging private creditors to participate on comparable terms. While this story is still very much unfolding and requires constant monitoring, we thought it would be useful to consolidate in one place the reaction of various key market participants to the DSSI and some of the alternative or supplemental proposals being put forward. While there are a lot of over-lapping themes, given the specificities of sovereign debt and the wide-ranging investor base, it is highly unlikely that there will be a "one-size-fits-all" solution, and consequently any substitute to a case-by-case approach for the reasons developed below.
The coronavirus pandemic continues to pose unprecedented challenges to countries across the world, which become all the more critical where developing countries already face high debt burdens. Developing countries will require significant liquidity and financing support to deal with the pandemic, which the IMF estimates amounts to at least US$2.5 trillion. Debt relief measures will help in providing some of this support, and both the IMF and the World Bank have announced enhanced lending facilities for developing country members to help deal with the crisis.
The DSSI applies to countries that are eligible to receive assistance from the World Bank's International Development Association, and to all nations defined as 'least developed countries' by the United Nations. The Institute of International Finance (the "IIF") estimates that debt service payments owed by DSSI-eligible countries between 1 May and the end of 2020 amount to approximately US$11 billion for official bilateral lenders, US$7 billion for multilateral lenders and US$13 billion for private creditors. At the time of writing, the Paris Club has signed agreements with the Caribbean islands of Dominica and Grenada and with Mauritania, Burkina Faso, Cameroon, Mali and Nepal to suspend debt payments until the end of the year as part of the DSSI, and is reportedly in talks with many more. However, many countries have been hesitant to engage in discussions with creditors thus far, in part due to concerns about triggering debt defaults and rating actions that could impair access to future financing.
Response from Private Creditors
Institute of International Finance
The IIF, a US-based trade association representing the private creditor community, with 450 members, most of which are financial institutions, has actively engaged with the initiative.
On 9 April, the IIF sent an open letter to the IMF, World Bank, OECD, and Paris Club expressing its "grave concern about the threat to debt sustainability posed by the COVID-19 pandemic."1 In the letter, the IIF expressed that a forbearance of a payment default for the poorest countries significantly affected by COVID-19 should be supported by both official and private creditors.
In a follow up letter on 1 May, the IIF offered additional broad qualifications for a proposed private sector participation in the debt relief initiative.2 Among other things, it suggested that private sector participation must be on a voluntary basis, where individual creditors will be in a position to determine whether their fiduciary duties allow them to participate in the initiative and on what terms. The IIF solidified and elaborated on these principles of private sector engagement in the release of its "Terms of Reference for Potential Private Sector Participation in the G20/Paris Club Debt Service Suspension Initiative" on 28 May.3
These terms recognise, as mentioned above, the need for a case-by-case approach and provide that the relevant creditors "will consider the requested debt service suspension on the basis of the underlying legal documentation in the most appropriate way" while not prejudicing any rights such creditors may have, since any support "is voluntary and will not affect the enforceability of obligations owed to such providers of finance by beneficiary countries". There is also the expectation that any such initiatives will be supported widely across the private investor community, it being "understood that [the sovereign] will be seeking broad participation among such creditors to support fair burden sharing". Interaction with other initiatives can also be seen, as the private creditors "who support the DSSI do so on the understanding that the relevant international financial institutions will monitor that appropriate measures are taken by beneficiary countries to lessen the impact of the COVID-19 pandemic and that redirected payments are used to this end and no other".
Africa Private Creditor Working Group
A group of 25 private creditors, representing over $9 trillion in assets under management, has formed the Africa Private Creditor Working Group (the "APCWG") to provide a forum for the negotiation of debt relief for African countries. Similarly to the IIF, the APCWG has stated its belief that a "one-size-fits-all" solution would be counter-productive, as it risks cutting many countries off from international commercial debt markets and could lead to an overall increase in the cost of capital for all emerging market sovereign and corporate debt issuers in the future.
Response from the Rating Agencies
Some commentators have also warned that requests for a standstill on repayments risk triggering downgrades of countries' credit ratings, which could make it more difficult and expensive for governments to borrow in the future.
S&P have said that while they would not treat debt relief from official creditors as a sovereign default on its own, a country's failure to pay its scheduled debt service would be viewed as a credit negative, which in some cases could constitute a sovereign default.
Moody's have stated that while debt relief from the official sector will benefit recipient countries, it raises the prospect of losses to private sector creditors, and presents a number of other complications such as risk aversion in, and disrupted access to, financial markets, which could spillover and impair financing opportunities even for borrowers who do not participate. Whether or not private sector participation in debt relief programmes will constitute a debt default under Moody's analysis will depend on the assessment of a number of factors, including whether default avoidance is present, the issuer's creditworthiness and the potential for economic loss to creditors.4
For example, on 27 May, Moody's placed Cameroon's B2 rating on review for downgrade, citing, among other things, the country's participation in the DSSI, which although unlikely to have rating implications on its own, raises the risk of default on privately-held debt.5
In a statement on 22 April, Fitch noted that the suspension of sovereign debt payments owed to multilateral development banks ("MDBs") could be negative for the ratings of the MDBs themselves. Delays of principal or interest payments on an MDB sovereign loan lasting more than six months would lead Fitch to classify the MDB's full exposure to this sovereign as impaired and could affect the MDB's credit profile according to Fitch's metrics. The most exposed Fitch-rated regional MDBs would be those operating in sub-Saharan Africa.
Alternative and Supplemental Proposals
In a policy paper published on 14 May, the United Nations Department of Economic and Social Affairs ("UN DESA") argues that, while the DSSI provides valuable breathing space, it will not on its own be sufficient to prevent widespread debt crises in many developing countries. The UN makes a number of policy recommendations to expand the DSSI, crucially to cover all highly-indebted countries that request debt relief, including middle-income countries, and for the participation of multilateral and commercial creditors. The UN DESA also notes that a moratorium will not suffice for many highly indebted countries, and the IMF's cancellation of debt service payments for the 25 most vulnerable countries for the next 6 months needs to be followed by more comprehensive action by the international community, including relief from all creditors.
Similarly, the United Nations Conference on Trade and Development ("UNCTAD") notes that while the DSSI is a welcome initiative, by linking eligibility to new or ongoing borrowing, it in fact prioritises concessional lending (and therefore new debt) over debt relief. Moreover, by suspending debt repayments through the end of 2020, the DSSI assumes that the pandemic will be only a swift and short shock to developing countries, with countries able to return to "business as usual" in 2021. As a first step, UNCTAD propose comprehensive and automatic temporary standstills on debt repayments, including all external creditors and with possible annual renewals based on debt sustainability assessments. In addition, UNCTAD call for an immediate stay on all creditor enforcement actions, and for those jurisdictions that govern most emerging market sovereign bond documentation to deter lawsuits against debtor countries (see the Jubilee Debt Campaign below). UNCTAD propose the creation of an "International Developing Country Debt Authority" to oversee the implementation of debt standstills and debt sustainability assessments in the longer term.6
The African Union and UNECA
African Finance Ministers, facilitated by the UN Economic Commission for Africa ("UNECA"), have called on the IMF, World Bank, ECB and MDBs to provide US$100 billion of emergency resources, involving the waiver of interest payments on public sector debt of US$44 million, as well as waiving interest on payments on trade credits, corporate bonds and lease payments in the private sector.7
In conjunction with the African Union, UNECA has also announced a proposal for African countries to exchange their commercial debt for new concessional paper. The AU and UNECA are designing a special purpose vehicle for the swap, guaranteed by a triple-A-rated multilateral bank or a central bank, and would convert the current debt into securities with a longer maturity, benefiting from a five-year grace period and lower coupons. Such a debt exchange could be similar to the Brady Plan that converted bank loans, mostly owed by Latin American countries, into new paper backed by US Treasury bonds in 1989. However, such a proposal would require bondholder agreement to proceed.
Center for Economic Policy Research (CEPR) Paper
In a CEPR Policy Insight paper, a group of leading sovereign debt experts has also responded to the DSSI suggesting that, while it is a positive step, its current scope is arguably limited. The group contends that the list of DSSI-eligible countries should include additional low and middle-income countries that face debt sustainability threats and that creditor participation needs to account for participation of private creditors. According to the group, the absence of mandatory private creditor participation in the DSSI raises the risk that any official debt relief afforded to eligible countries may be used to service their private-sector debt rather than finance health-related expenditures to combat the COVID-19 pandemic.
To neutralise the risk, the group proposes a mechanism whereby each country requesting relief can create a central credit facility ("CCF") with an MBD, such as the World Bank, where it deposits all interest payments on commercial and bilateral debt falling due during the prescribed standstill period. Under the CCF, the amounts of such interest payments would be reinvested and redeployed to finance a pre-determined and monitored set of emergency expenditures arising out of the COVID-19 crisis.
Creditors entitled to those interest payments will instead receive an identical instrument in the form of an interest in the country's CCF. Such interest will correspond to the amount of the creditors' reinvested interest payments and will enjoy de facto seniority in any future liability management transaction of the debtor country. The receipt of such instrument will constitute a full discharge and release of the debtor's obligation in respect of the interest payment. In the case of obligations under international bonds, acknowledgment of such discharge will take effect through a consent solicitation addressed to all holders of each bond.
While the proposal focuses on the creation of a limited facility with respect to interest payments, the group contemplates that a similar mechanism can be implemented for deferral of principal payments.
Jubilee Debt Campaign
The Jubilee Debt Campaign, a UK-based charity, has called for all principal, interest and charges on sovereign external debt due in 2020 to be cancelled permanently. With around 90% of bonds of the relevant countries governed by English law, the group is lobbying the UK Government to pass legislation to prevent lenders from suing countries for non-payment of debt due to the coronavirus crisis, similarly to the Debt Relief (Developing Countries) Act passed in 2010 restricting creditors from suing countries eligible for the Heavily Indebted Poor Countries (HIPC) debt relief initiative.
World and Field Leaders
While many commentators have welcomed the G20's action as an important first step, they have also highlighted the need for broader, stronger support. With the next G20 meeting scheduled for November, a long list of 230 current and former world leaders, international institution heads, global health experts and economists wrote publicly to the G20 on 1 June to call for an urgent second meeting to provide a strongly coordinated global response to tackle the coronavirus pandemic. Among other things, the group called for the urgent deployment of the US$2.5 trillion stimulus package the IMF identified would be needed by developing countries to respond to the pandemic, the issue of US$1 trillion through special drawing rights to regenerate global growth, and for the G20 to scale up its debt suspension initiative to include relief from bilateral, multilateral and private creditors until the end of 2021. The group also noted that time was running out for voluntary participation, and that a binding approach for such relief should now be considered.
Despite a large volume of commentary and proposals produced in response to the DSSI, some of which we discuss above, it is clear that questions still remain regarding the implementation of the DSSI, in particular around the extent of collaboration from the private sector and what the potential credit rating, market access or other longer term consequences might be for countries which choose to participate (or perhaps not participate) in such an initiative. The next steps in the implementation of the DSSI, or in the development and deployment of alternative solutions, remain to be seen. Ultimately, any change to the terms of a country's debt obligations will require engagement with, and consent of, creditors within the framework of the original contractual documentation.
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