The executive director of the United Nations Economic Commission for Africa (UNECA) recently warned that the economic effect of the covid-19 pandemic is likely to force more countries to resort to debt relief from international private lenders.
“African countries do not have the resilience cushions that they had in 2020,” explained Vera Songwe, admitting that “there will probably be more countries that
will opt for the G20 debt framework.
In an interview quoted by Bloomberg, the also undersecretary-general of the United Nations said that the recourse to the Common Debt Framework in addition to the Debt Service Suspension Initiative (DSSI) comes because African countries need more money to buy covid-19 vaccines.
In January, Chad became the first African country to ask for debt relief under the terms agreed in November by the G20, which implies that anyone who gets a moratorium on official debt, i.e. to countries and financial institutions, has to
ask for the same terms from the private sector.
This implies, according to the financial rating agencies, a change in the terms agreed with private creditors, which automatically sets up a situation of Financial Default, or ‘default’, because the original contract is changed.
After Chad, Ethiopia announced it would approach private creditors, and Zambia, which was the first country to default just last year, followed suit.
In the interview quoted by Bloomberg, Vera Songwe did not specify which countries he foresees asking for a restructuring of private debt, but said that there are nations less equipped to meet the demands of citizens and pointed out
that these countries are the ones made most vulnerable by the pandemic crisis.
Ethiopia’s announcement led to a rise in interest rates demanded by investors to transact debt securities, a sign that the market foresees a financial default, and Fitch downgraded this country’s rating arguing precisely with the intention to restructure Eurobonds.
“The market is looking for profits, and they are not making great profits in other geographies; this is a geography where they are making a good return,” he said.
Vera Songwe, recalling the case of Ivory Coast, which went to the market twice since November, and already after having joined the DSSI in June last year, with interest rates around 5%.
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 multi-lateral financial institutions, with an initial deadline of December 2020, which was then extended to June this year, with the possibility of a further six-month extension.
This initiative only suggested that countries seek private sector debt relief, whereas the Framework, approved by the G20 in November, states that private creditors must be approached, even though it does not explicitly say what happens if they are not approached.
explicitly say what happens if there is no agreement between the debtor and the creditor.
“It’s not clear what that means for holders of ‘Eurobonds,’ we’ll get more clarity when one or two countries move forward, but essentially when you restructure a debt, you put everything into the same basket,” said the economist, who spent more than a decade at the World Bank before moving to the UN in 2017.
