TOUGH CHOICE

…Poorest countries face tough choice over G20 debt relief plan

LONDON - The world’s poorest countries could soon be facing a tough decision - double up on debt relief from the G20 with the caveat they must default on private creditors, or quit the programme to try to keep financial markets on side.

Rich countries on Friday backed an extension of the G20's Debt Service Suspension Initiative (DSSI), approved in April to help developing nations survive the coronavirus pandemic and which has seen 43 of a potential 73 eligible countries here defer $5 billion in 'official sector' debt payments.

The European Network on Debt and Development (Eurodad), comprising 50 non- governmental organisations, estimates that extending that temporary freeze by six months would provide a further $6.4 billion of relief, rising to $11.4 billion if the extension runs to the end of 2021.

That would be just over a quarter of next year’s combined debt payments for countries already signed up to the DSSI, and worth up to 4.3% of GDP for nations like Angola, according to Fitch Ratings.

But a significant string may be attached.

Amid warnings the pandemic could push 100 million people into extreme poverty, World Bank President David Malpass is calling for banks and investment funds that have lent to DSSI countries to be involved too.

“The relief so far is too shallow to provide light at the end of the debt tunnel,” Malpass told the United Nations on Tuesday. “Commercial creditors are not participating in the moratorium, draining the financing provided by multilateral institutions.”

Kevin Daly of Aberdeen Standard Investments, who is part of a joint-private sector response to the DSSI proposals, thinks views like Malpass’s mean private sector involvement (PSI) - writedowns for bondholders - could become “mandatory” under the expected extension.

Such a change could be flagged at this month’s IMF meetings.

Eurodad calculates DSSI countries are due to pay private sector bondholders $6.4 billion and other private lenders $7.1 billion next year - a combined $13.5 billion that exceeds what the signed- up countries owe to G20 governments.

“We have already heard there is a strong possibility that this (PSI) can be the case,” said

Angola’s Secretary of State for Budget and Investment, Aia- Eza Silva, while adding that Angola’s main focus remains bilateral creditors like China.

Charity groups estimate that 121 low- and middle-income governments spent more last year servicing external debt than on public health systems that are now at breaking point, making a powerful moral case for relief. There are other complicating factors, however.

Credit rating agencies S&P Global, Moody’s and Fitch have warned that if countries do suspend or defer debt payments to the private sector it would almost certainly be classed as restructuring and default under their criteria. –