Financial ratings agency Scope Ratings today ruled that the most indebted countries risk a lost decade of economic growth if the public debt restructuring model is not overhauled.
Designing a debt relief model that goes beyond the two current frameworks “is necessary and could represent the difference between achieving a sustainable recovery in debtor countries or losing a decade,” argue analysts at the German-based rating agency.
According to an analysis of the latest developments regarding African public debt, sent to investors and to which Lusa had access, the analysts consider that “the framework of the G20 moratorium extension ultimately ‘belly-aching’ the problem by recognising that many African governments require more substantive debt restructuring to regain market access at sustainable interest rates.
The public debt moratorium provided by the G20 is only beneficial to African economies in the short term, implying higher payments in the medium term, they argue.
“The latest and most recent extension of the Debt Service Suspension Initiative (DSSI) will result in more short-term savings for the world’s poorest countries, including African ones, but these savings are offset by higher medium-term debt payments, possibly higher than the nominal amounts suspended due to the net present value principle,” say the experts of this German ‘rating’ agency.
Scope Ratings stresses that what would be appropriate would be “a DSSI+, a more ambitious debt restructuring programme, which extends the current DSSI architecture and goes one step beyond the Common Framework” announced by the G20 and Paris Club in November.
As well as not covering middle-income countries, but only the poorest, the DSSI architecture, says this rating agency, “lacks the enforcement mechanisms that could ensure equitable treatment of different types of creditors, which means that different creditors may end up contributing differently to debt treatment.”
The composition of Africa’s debt has been changing over time, including more and more Chinese creditors, which makes it difficult to bring creditors together in one committee, as should soon happen with Chad, one of the first countries, along with Ethiopia and Zambia, to join this new sovereign debt restructuring instrument.
“The deferral of debt servicing is welcome for the 46 countries participating globally in the DSSI that are struggling to direct funds to fight the pandemic, but it has the potential high risk of placing some of the most vulnerable in a problematic debt distress position,” the analysts write, arguing that the payments will be due “at a period in the future when there may be less international support for debt relief.”
The DSSI is an initiative launched by the G20 in April last year that guaranteed a moratorium on debt payments from the most indebted countries to the most developed countries and multilateral financial institutions, with an initial deadline of December 2020, but which was successively extended until the end of this year.
This initiative only suggested that countries seek debt relief from the private sector, while the Common Framework, approved by the G20 in November, states that private creditors must be approached, although it does not say explicitly what happens if there is no agreement between debtor and creditor.
Three African countries (Chad, Ethiopia and Zambia) asked to join this framework, but several analysts believe that more countries will have to join due to their difficult financial situation, despite resistance from countries that will automatically see their rating downgraded if they go ahead with private debt restructuring, making it difficult to access the market and finance the development of their economies.
The proposal presented by the G20 and Paris Club in November is the second phase of the DSSI, launched in April, and which was widely criticised for not forcing private debt to participate in the effort, since it would open the way for indebted countries not to pay official and bilateral creditors (countries and multilateral financial institutions) and to continue servicing private debt.
This Framework aims to bring all the debt actors on board, including China’s private and public banks, which have become the largest creditors of the governments of developing countries, particularly those in Africa.
