G20 summit: A breakthrough in sovereign debt management system
Editor's note: Djoomart Otorbaev is the former Prime Minister of the Kyrgyz Republic, a distinguished professor of the Belt and Road School of Beijing Normal University, and a member of Nizami Ganjavi International Center. The article reflects the author's views and not necessarily those of CGTN.
In my recent piece, I wrote, "It will probably be a good idea to create a special working group of G20 finance ministers to produce universal 'rules' to various groups of creditors on how to manage poor countries' debts." I am happy that such decision has been made on November 22 by the leaders of G20. They adopted a specific document — the Common Framework for Debt Treatments.
Many experts agreed that this decision was the most important collective action of the G20 in response to the pandemic. In April, the finance ministers of the G20 introduced the so-called Debt Service Suspension Initiative (DSSI). This framework means that the creditors will halt debt service payments from 73 developing countries if debtors ask for a suspension.
"We should keep our support for developing countries and help them overcome the hardships caused by the pandemic," President Xi Jinping said to other G20 leaders. China has fully implemented the G20 DSSI while overcoming its difficulties, with the total amount exceeding $1.3 billion, he noted.
The decision made last week can be called "historic" because, for the first time, it includes both private creditors and China. As it is known, China is a world's leading creditor to poor countries, accounting for 63 percent of all loans at the end of 2019. Currently, 46 out of 73 eligible nations have benefited from a suspension of interest payments to the tune of $5.7 billion. Though Saudi Finance Minister Mohammed al-Jadaan called it "a breakthrough," it is a drop in the ocean compared to the $11 trillion the G20 nations have spent fighting the pandemic's economic effects.
Let me analyze what exactly has been achieved at the summit.
In connection with the difficult situation associated with the pandemic's development, the main creditors decided in April to restructure the poor countries' debts for this year. In October, they extended those "holidays" till July 2021. But specific rules that would be used by all creditors, regardless of the form of ownership, were not specified.
The decisions in April and October made little mention of sovereign borrowing provided by private investors. But they turn out to be important too. On November 13, Zambia became the sixth country to default on its sovereign bonds this year after Argentina, Belize, Ecuador, Lebanon, and Suriname. Others may follow. Fitch rating agency gives 38 sovereign bonds a rating of B+ or worse, where B denotes a "material" risk of default. According to its projections, governments with a junk rating BB+ or worse may soon outnumber those classified as investment grade. So far, the private lenders were quite reluctant to share in donor's efforts, which is unfair.
At present, there is only one organization in the world that practices general rules for managing sovereign debt, which is the Paris Club of creditors. The Paris Club was created in 1956 when the first negotiation between Argentina and its public creditors took place in Paris. The Club is a group of officials from important creditor countries whose role is to find solutions to debtors' payment difficulties.
There is a paradoxical situation when many G20 vital lenders, including China, which is the largest lender in the world, are not members of the Paris Club.
New rules will be based on the Paris Club's general principles for those G20 members who are not yet part of the club. Simultaneously, any borrower who intends to restructure loans from the G20 countries must seek a similar restructuring from all other donors, including the private ones. Thus, the distinction between public and private lenders has been removed. China, with a few other donors, explicitly insisted on this position.
The creditors agreed to develop and implement all necessary regulations that would not allow private lenders to "shirk" the restructuring that may be necessary. It was decided to introduce more flexible lending instruments, such as, for example, "binding bonds," which would consider possible objective difficulties that borrowers may face with the repayments. As such, a broader interpretation of the term "force majeure" will be given. In the context of some unexpected crises, the issuer may extend the maturity and/or postpone interest payments for some time in exchange, for example, for paying additional interest at the end of the loan period.
Within this "common framework," preference will be given to varying interest rates (deferred payments) rather than touching the loan's main body. If private lenders resist paying their share and push for full price in courts, the governments of G20 countries must pass additional legislation to limit the profits that vulture funds can make from litigation.
In the case of private investors, donors have decided to start to develop new instruments, in which it could be determined when and how the fixed income could become more flexible. For example, at an uncertain time, "new" bonds could automatically reduce fixed payments, in the case, for instance, of commodity prices sharp fall, in the event of natural disasters, etc. Other instruments may provide additional charges when GDP growth exceeds a threshold.
Some of these instruments may require creating an independent international regulator to standardize procedures and resolve disputes.
I believe that the G20 summit managed to make a "breakthrough" in creating some universal rules that would suit all creditors and binding on both borrowers and lenders. Globalization and unification of this critical problem will be an essential step towards building a more harmonious world.a