Sovereign Debt and Financing for Recovery - AFTER THE COVID-19 SHOCK NEXT STEPS TO BUILD A BETTER ARCHITECTURE - Group of Thirty
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Sovereign Debt and Financing for Recovery
AFTER THE COVID-19 SHOCK
NEXT STEPS TO BUILD A BETTER ARCHITECTURE
Disclaimer
This report is the product of the Group of Thirty’s Steering Committee and Working
Group on Sovereign Debt and COVID-19 and reflects broad agreement among its
participants. This does not imply agreement with every specific observation or nuance.
Members participated in their personal capacity, and their participation does not imply
the support or agreement of their respective public or private institutions. The report
does not represent the views of the membership of the Group of Thirty as a whole.
ISBN 1-56708-182-7
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Sovereign Debt and Financing for Recovery
AFTER THE COVID-19 SHOCK
NEXT STEPS TO BUILD A BETTER ARCHITECTURE
Published by
Group of Thirty
Washington, D.C.
May 2021
Working Group on Sovereign Debt
and COVID-19
STEERING COMMITTEE
Guillermo Ortiz, Co-Chair Tidjane Thiam
Partner, BTG Pactual Special Envoy for COVID-19, African Union
Former Governor, Banco de México Former CEO, Credit Suisse
Former Secretary of Finance and Public Credit, Mexico
Jean-Claude Trichet
Lawrence H. Summers, Co-Chair Former President, European Central Bank
Charles W. Eliot University Professor, Harvard University Honorary Governor, Banque de France
Former Secretary of the Treasury, United States
William R. Rhodes
President and CEO, William R. Rhodes Global Advisors
Former Chairman and CEO, Citibank
PROJECT DIRECTOR
Anna Gelpern
Professor of Law and Anne Fleming Research Professor,
Georgetown Law
Nonresident Senior Fellow, Peterson Institute for
International Economics
WORKING GROUP MEMBERS
Arminio Fraga Gail Kelly
Founding Partner, Gávea Investimentos Senior Global Advisor, UBS Group AG
Former Governor, Banco Central do Brasil Former CEO & Managing Director, Westpac Banking
Corporation
GROUP OF THIRT Y iiiiv Sovereign Debt and Financing for Recovery AFTER THE COVID-19 SHOCK Mervyn King Tharman Shanmugaratnam Member of the House of Lords, United Kingdom Senior Minister, Singapore Former Governor, Bank of England Chairman, Monetary Authority of Singapore Maria Ramos Mark Walker Co-Chair of the Secretary General’s Task Force on Senior Managing Director and Head of Sovereign Digital Financing of Sustainable Development Advisory, Guggenheim Securities Goals, United Nations Former Managing Partner, Cleary Gottlieb Former Chief Executive Officer, Absa Group Steen & Hamilton Hélène Rey Zhou Xiaochuan Lord Bagri Professor of Economics, President, China Society for Finance and Banking London Business School Former Governor, People’s Bank of China PROJECT ADVISOR Joseph E. Gagnon Senior Fellow, Peterson Institute for International Economics RESEARCH ASSISTANT Alexander Nye
Table of Contents
Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................................................................................................................ . . . . vi
Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................................................................................................................ . . . vii
Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................................................................................................................ . . viii
Introduction and Executive Summary. . ................................................................................................................ . . . . . . 1
I. Economic and Policy Developments. . ............................................................................................................. . . . . . 6
II. Multilateral Financing Must Be Bold and Creative to Support
an Equitable Recovery and Prepare for Future Shocks........................................................................ . . . . 17
III. Implementing the Common Framework: Comparability of Treatment and Beyond............... . . . 20
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................................................................................................................ . . . 28
Group of Thirty Members 2021.. . . . . . . . . . . . . . . . ................................................................................................................ . . . 30
Group of Thirty Publications since 2010. . ............................................................................................................ . . . 34Foreword
T
his report by the Group of Thirty (G30), Sovereign at strengthening the multilateral Common Framework for
Debt and Financing for Recovery after the COVID-19 debt treatment. It makes clear that now is the time to build
Shock: Next Steps to Build a Better Architecture, lays a more inclusive, comprehensive, comparable, transparent,
out the continuing challenges in seeking to ensure eco- and better understood architecture.
nomic stability and prosperity as countries emerge from On behalf of the G30, we extend our thanks to
the pandemic. Guillermo Ortiz and Lawrence Summers for their astute
It builds on a preliminary study that was released in leadership of the Working Group behind the report, to the
October 2020. The recommendations from that study extremely capable Project Director, Anna Gelpern, and to
added meaningfully to calls for increased resources and Project Advisor, Joseph Gagnon, for their carefully con-
greater urgency of action to deter a lasting economic and sidered construction of the report. We also thank those
debt crisis in many developing countries. who participated in the study as Steering Committee and
There is no scope for policy complacency. The G30 Working Group Members.
report lays out a series of concrete recommendations aimed
Jacob A. Frenkel Tharman Shanmugaratnam
Chairman, Board of Trustees Chairman
Group of Thirty Group of Thirty
vi Sovereign Debt and Financing for Recovery AFTER THE COVID-19 SHOCKAcknowledgments
O
n behalf of the Group of Thirty, we would like to We also extend our thanks to Project Director, Anna
express our appreciation to those whose time, talent, Gelpern, and to Project Advisor, Joseph Gagnon, for their
and energy have driven this project to a successful support and careful drafting of the report, and to Alexander
completion. We would like to thank the members of the Nye for his research assistance and efforts on this report.
Steering Committee and Working Group on Sovereign The coordination of this project and many aspects of
Debt and COVID-19, who guided our collective work at project management, Working Group logistics, and report
every stage.* The intellect and experience of this diverse production were centered at the G30 offices in Washington,
and deeply knowledgeable team were essential as we sought D.C. This project could not have been completed without
to craft the report’s findings and recommendations to the efforts of our editor, Diane Stamm, and the work of
support an equitable global recovery and strengthen sov- the Executive Director, Stuart Mackintosh, and his team,
ereign debt architecture. including Desiree Maruca and Emma Prall. We are grateful
to them all.
Guillermo Ortiz Lawrence H. Summers
Co-Chair Co-Chair
Working Group on Sovereign Debt and COVID-19 Working Group on Sovereign Debt and COVID-19
* Other members of the G30, most notably Axel Weber, contributed valuable insights. We are deeply grateful to them.
GROUP OF THIRT Y viiAbbreviations ACT Access to COVID-19 Tools Initiative ADB Asian Development Bank CACs Collective Action Clauses COVAX COVID-19 Vaccines Global Access DSSI Debt Service Suspension Initiative GDP Gross Domestic Product IBRD International Bank for Reconstruction and Development ICMA International Capital Market Association IDA International Development Association IFC International Finance Corporation IFIs International Financial Institutions IIF Institute of International Finance IMF International Monetary Fund IOSCO International Organization of Securities Commissions MDB Multilateral Development Bank OECD Organisation for Economic Co-operation and Development SDR Special Drawing Rights UN United Nations UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme WHO World Health Organization viii Sovereign Debt and Financing for Recovery AFTER THE COVID-19 SHOCK
Introduction and Executive Summary
C
OVID-19 did not trigger a wave of sovereign debt that vaccinations for COVID will become a recurring event
defaults in 2020. It killed millions, disrupted eco- with boosters for new variants, similar to and more urgent
nomic activity on an unprecedented scale, and undid than seasonal influenza vaccinations. Countries with fewer
decades of progress in poverty reduction. The extraordinary resources will see worse health and economic outcomes, and
domestic policy response across mature markets inciden- have a harder time containing the virus within their borders.
tally benefited emerging and frontier market economies: Over the next several years, the emerging and
the prospect of perpetually low interest rates sent inves- frontier markets face a heightened risk of market dis-
tors scouring the world for risk assets. Dramatic capital ruptions in response to local resurgences of COVID-19
outflows subsided within months, commodities markets or to tightening financial conditions that might arise
recovered faster than expected, and some higher rated bor- from higher inflation in advanced economies. Most
rowers continued to tap foreign markets. Spillovers from borrowed significantly in 2020 to respond to the pandemic
advanced economy stimulus partly made up for the and now face somewhat higher interest rates and volatile
halting international response to the pandemic. market conditions. A spike in ten-year U.S. Treasury
Relative to projections from last fall, economic growth yields prompted new outflows from these economies in
has been revised up in 2020 and 2021 across all major February of 2021, drawing comparisons with the 2013
regions. But cumulative output losses relative to pre-pan- Taper Tantrum. Disruptions in supply chains and other
demic projections are very large in low- and middle-income pandemic-related bottlenecks are driving price increases
countries (Figure 1) and the risks to future global growth in some key countries, raising the danger that higher infla-
are severe. It would be wrong to conflate recent good tion and the monetary policy response it calls for would
economic news with an adequate policy framework at hamper economic recovery. A successful new round of U.S.
the global level, disregarding major risks ahead. fiscal stimulus and faster growth in advanced economies
In the near term, low- and middle-income countries could benefit countries with commodity and manufactured
confront a COVID-19 resurgence with more contagious, exports to them, but further increases in U.S. interest rates
more deadly, and possibly vaccine-resistant variants. could raise borrowing costs and disrupt market access for
Wealthy economies have secured the bulk of the world’s emerging and frontier economies. Countries that borrow
vaccine supply. It may take two to three years to inoculate a mostly in local currencies are less vulnerable to these
majority of the population in most low- and middle-income pressures but still may face a worsened tradeoff between
countries. The latest wave of infections in India, South Africa, monetary and fiscal support in the continuing pandemic
South America, and Southeast Asia is ravaging younger and temporarily higher inflation.
populations, overwhelming public health capacity, and Low- and middle-income countries risk a lost
suppressing economic activity. It appears increasingly likely decade of growth; for some of them, fallout from the
GROUP OF THIRT Y 12 Sovereign Debt and Financing for Recovery AFTER THE COVID-19 SHOCK
FIGURE 1
Cumulative Projected Gross Domestic Product Losses for 2020-2024
0
-5%
-5 -8%
-10%
-10
Percentage points of annual GDP
-16%
-15
-20
-25 -28%
-30
-35%
-35
-40
-46%
-45
-50
United States Emerging and developing Asia (without China)
Advanced economies (without the US) Latin America and the Caribbean
Emerging and developing Europe Sub-Saharan Africa
China
Source: IMF
Note: Figure displays cumulative losses from 2020 through 2024 in projected real GDP between the October 2019 and April 2021 World Economic Outlook forecasts.
pandemic risks a lost generation. The convergence of Most pressing is the need to produce and distribute
low-income economies toward upper income levels has more vaccines for low- and middle-income countries.
been set back several years and poverty rates have increased. The global Access to COVID-19 Tools (ACT) Accelerator
The risk of more entrenched inequality among and within Initiative at the World Health Organization (WHO) has
countries raises the potential for increased social strife less than half of the resources it needs to develop and dis-
and political turbulence. Other long-term risks include an tribute COVID-19 tests, treatments, and vaccines just in
increase in protectionism, rising international tensions, and 2021. Even from the narrow perspective of the advanced
a higher probability of financial crises in the years ahead as economies, the benefits to reaching herd immunity glob-
countries struggle with higher debt and other legacies of ally and thus preventing the emergence of dangerous new
the pandemic. variants of SARS-CoV2 far exceed the cost.
If these risks materialize, the damage would spread The preliminary report of this Working Group
beyond the most vulnerable countries, and threaten in October 2020 called for new funding on an
growth in many parts of the world. A powerful, unprecedented scale, for transforming multilateral
creative, and coordinated international response concessional surge capacity, and for a fundamental
is in order. More than a year into the pandemic, the overhaul of sovereign debt crisis management archi-
response remains unfocused and underfunded. While we tecture. The need is more acute now. By the IMF’s latest
welcome expected agreement on a record US$650 billion estimates, low-income countries alone need US$200
International Monetary Fund (IMF) Special Drawing billion through 2025 for pandemic response and recovery,
Rights (SDR) allocation and on advancing the next in addition to US$250 billion for investment to acceler-
International Development Association (IDA) replenish- ate convergence. The three largest credit rating agencies
ment by a year, these and other constructive steps fall far issued more than 50 sovereign downgrades and hardly any
short of the minimum necessary. upgrades for low- and middle-income countries since theGROUP OF THIRT Y 3
start of 2020. Downgrades continue at a slower pace in Framework), according to United Nations Development
2021, but average ratings for African and Latin American Programme (UNDP) staff estimates.2
sovereigns remain the lowest on record.1 At the start of The G-20 Common Framework remains a work in
2021, foreign investment had fallen to its lowest since progress. Chad, Ethiopia, and Zambia have applied; Chad
2007. With slower growth, more debt, and debt denomi- has started negotiations with an official bilateral creditor
nated in foreign currencies, countries in Latin America committee comprising members and non-members of the
and Sub-Saharan Africa are especially exposed. Island and Paris Club. Engaging non-Paris Club creditors in a more
coastal economies that lost all tourism revenues to the pan- structured coordination process is an essential step for debt
demic are left to fight climate disasters with empty coffers. architecture reform, but the terms of engagement are too
Upwards of two-thirds of the new SDR will sit idle in the vague to shape a new regime or ground market expectations.
IMF accounts of countries that do not need to use them, New creditors and new kinds of debt compound
which will reduce the impact of the historic US$650 billion already-vexing coordination problems in sovereign
allocation and send a troubling signal for multilateralism, debt restructuring. Inter-creditor competition has already
unless these countries step forward to recycle their SDRs. delayed debt restructuring, disrupted payments, and threat-
Collective aversion to crisis planning—ostensibly ened recovery in a handful of countries. Official bilateral
for fear of triggering a self-fulfilling prophecy of debt and multilateral creditors, commercial banks and asset
default—is irresponsible when much of the world is managers, hybrid financial institutions, and non-financial
one unforeseen shock away from a lost decade. It is well firms from China, Europe, the Middle East, and North
established that sovereign debt crises are associated with America must agree on loss distribution with limited infor-
financial instability and protracted periods of lost growth mation about one another’s claims, few shared norms, and
in the emerging markets. A financial shock on the heels of no central authority to bind them. Substantive burden-
a public health crisis would exacerbate and entrench long- sharing negotiations devolve into arcane arguments over
term damage from COVID-19. Knowing the consequences nomenclature. IMF and Paris Club involvement do not
of failure, fear of planning to fail cannot excuse repeated guarantee sustainable outcomes or fair burden sharing,
failure to plan. despite public professions of commitment to both. Lack
COVID-19 exposed big gaps in the sovereign debt of visible private sector involvement in DSSI and the
restructuring architecture. The Debt Service Suspension Common Framework so far adds to pressure for legislative
Initiative (DSSI), extended through the end of 2021, has solutions, most recently in New York State, and motivates
suffered from design flaws, muddled messaging, and anemic calls for the United Nations (UN) Security Council to
participation. When participation hinges on debtor ini- shield governments’ assets from their creditors.
tiative, sovereigns' fear of stigma—fueled by ratings and Existing contracts can interfere with debt
market commentary, and lumped with lack of demand— restructuring. Blanket promises of confidentiality, lender-
makes inaction the default option. Some debtors and controlled revenue accounts, and clauses that link debt
creditors explicitly distanced themselves from DSSI. The contracts to a web of bilateral interests, appear often in
initiative has freed up US$5.7 billion so far, or less than sovereign debt contracts with Chinese lenders, but are not
half of the projected total, mostly because eligible coun- limited to them. Revenue-backed sovereign borrowing is on
tries applied later and in smaller numbers than expected, the rise, sometimes unconnected with revenue-generating
and received less cash flow relief than expected. With the investment projects. Promises of preferential treatment
flagship debt initiative limited to payment postponement, made behind closed doors undermine debt legitimacy in
deeper sovereign debt restructuring happened outside the eyes of the public, sow distrust among creditors and
DSSI in 2020. More than a third of vulnerable countries donors, and undercut recovery programs supported by the
are ineligible for DSSI and, by extension, for the Common International Financial Institutions (IFIs).
Framework for Debt Treatments beyond DSSI (Common Messier and more damaging sovereign debt crises lie
ahead unless the international community acts promptly
1 Goel & Papagiorgiou 2021
2 Jensen 20214 Sovereign Debt and Financing for Recovery AFTER THE COVID-19 SHOCK
to bring debt architecture into the 21st century. We of payments financing, donor funds to support conces-
emphasize, as we have in our preliminary report, that there sional lending, or debt relief.
is no silver bullet for sovereign debt problems. Nonetheless,
it is essential to reform the institutional framework in which 3. The G-20 should make all countries with pressing debt
increasingly diverse debtors and creditors make decisions to vulnerabilities, regardless of national income, eligible
borrow, lend, and restructure. Mindful of countries’ differ- for the Common Framework, and should take further
ent circumstances, we recommend: steps to reduce uncertainty and stigma associated with
seeking necessary debt relief. Even in this initial phase,
1. Boosting concessional surge capacity at Multilateral there is no policy reason to limit Common Framework
Development Banks (MDBs) must be a priority for the participation to low-income DSSI countries, many of
international community. While we welcome the deci- which have scarcely any eligible debt, and most of which
sion to advance the next IDA replenishment by a year, badly need net new financing.
we recognize that such one-off exceptional measures
are not a sustainable way to meet multi-year recovery 4. Common Framework creditors should continue to
needs and respond to future shocks without pushing reaffirm and elaborate the comparability of treatment
countries into debt distress. The World Bank Group principle, adopted from the Paris Club, to cover all
and Regional Development Banks (RDBs) should material categories of creditors and instruments. The
use more fast-disbursing loans and grants and more IMF should use its policies to complement a more robust
flexible and contingent instruments to support sound approach to comparability, so that distressed countries
policies against exogenous shocks. Maintaining current would not be held hostage to inter-creditor conflicts.
levels of support for IDA grant and loan recipients
alone through 2024 would require increasing the next 5. The G-20 should establish a standing consultative mech-
donor replenishment by a third. More than doubling anism in conjunction with the Common Framework,
IDA’s market borrowing to US$35 billion in today’s with a mandate to promote consistency, equity, and
low interest rate environment would free resources for transparency in the framework’s case-by-case approach.
a substantial increase in grants, as recommended in Such a mechanism should help gather and distribute
the preliminary report of this Working Group, with no information, advise the parties on methodological and
damage to its creditworthiness.3 process questions in real time, and promote the devel-
opment of contractual and other tools to streamline
2. The IMF should establish an augmented pandemic negotiations and implement debt restructuring agree-
support window for longer-term financing to manage ments. It should include representation from all major
prolonged structural disruptions from COVID-19 and stakeholders, have the authority to entertain questions
future public health shocks. A new window would help regarding substantially all material external claims
mobilize some of the IMF’s under-utilized non-conces- against the sovereign, have access to information con-
sional lending capacity, which now exceeds a trillion cerning such claims, and speak publicly on matters
U.S. dollars, to fund well-designed public health crisis within its remit.
response measures at the current low interest rates. We
also reiterate the view expressed in our preliminary 6. National law in major financial markets should shield
report, that transparent and replicable procedures for payment systems and payment intermediaries from
recycling IMF SDR voluntarily among IMF members disruptive sovereign debt collection, including, if nec-
would amplify the impact of the US$650 billion SDR essary, legislation modeled on Belgium’s law shielding
allocation and bolster the global safety net for the Euroclear. Because national governments’ assets abroad
public health, climate, and financial crises to come. It are normally immune from seizure, direct sovereign
would not eliminate the need for emergency balance debt enforcement is a perennial challenge. Recent cases
3 S&P Global Ratings 2021GROUP OF THIRT Y 5
of enforcement targeting payments to other creditors 8. Private sector, official, and multilateral lenders should
have been fraught with externalities. Commandeering encourage sovereign borrowers to adopt robust domestic
payment systems for sovereign debt enforcement is not debt disclosure requirements as part of clear domestic
in the public interest. debt authorization frameworks. Hidden debt does eco-
nomic and political damage to the borrowing country,
7. The G-20 should publicly disavow the use of contract fuels mistrust among creditors, and deprives public
terms that impair debtors’ or creditors’ participation in institutions, including the IFIs, of vital information
international debt negotiations, and should commit they need to devise reform and recovery programs.
not to enforce them in their existing bilateral debt The G-20, the IFIs, and the Institute of International
contracts, as well as those of their agencies and state- Finance (IIF), working with the Organisation for
owned lenders. Such terms stand in tension with the Economic Co-operation and Development (OECD),
Common Framework and with international norms, have all launched new work streams to promote mean-
and should be understood as contrary to public policy ingful debt transparency, but have very limited tools
in each participating country. As the largest bilateral to enforce it. A strong shared norm that hidden debt is
creditor, China should lead the way by removing prior not merely undesirable, but presumptively unauthor-
constraints on its lenders’ participation in international ized and should not be enforced, would fortify existing
debt restructuring initiatives. barriers to enforcement in major financial jurisdictions
and bolster incentives to disclose.I. Economic and Policy Developments
C
OVID-19 has killed over three million people world- All of these risks pose difficult choices for domestic
wide, and threatens to push 100 million people into policy in low- and middle-income countries. Some have
extreme poverty. At the start of the pandemic, many moved quickly to raise policy interest rates faced with price
governments—including those of the United States, the increases from pandemic-related supply chain disruptions.
United Kingdom, Brazil, and Chile—based their strate- The COVID-19 resurgence, more business closures and
gies on the most optimistic and politically expedient of reduced capital inflows may force policymakers to accept
the early pandemic models. April 2020 predictions of U.S. a combination of temporarily higher inflation and higher
deaths peaking below 70,000 missed by a factor of eight. fiscal deficits to keep economies operating at their (pos-
The pandemic and the associated lockdowns have had a far sibly temporarily lower) level of potential while protecting
more devastating humanitarian impact than most officials those households most severely affected. Countries with
were willing to admit in public a year ago. On the other significant debt in foreign currencies are especially vulner-
hand, economic growth has continued to surprise on the able to higher interest rates and rising exchange rates in
upside in advanced, emerging, and developing economies. advanced economies. Each scenario presents a substantial
Large-scale sovereign debt defaults forecast in IMF, World risk to regional and global growth.
Bank, and United Nations Conference on Trade and The international economic response to COVID-19
Development (UNCTAD) reports last year failed to mate- continues to be modest in scope and uneven in its execution.
rialize. Emerging and frontier market countries benefited It has exposed flaws and gaps in the international financial
from foreign investors’ search for yield and willingness to architecture for crisis management and debt restructuring.
hold risk assets in response to extraordinary policy mea- The international community has moved through a suc-
sures in the advanced economies. cession of stopgap measures that fall short of an ambitious
Governments in low- and middle-income countries face vision and the decisive steps needed to reform the system.
three broad categories of risk:
(i) the risk of greater pandemic resurgence, ECONOMIC DEVELOPMENTS
which would affect these countries dispropor- The impact of the public health shock on output has varied
tionately, widely: the world economy contracted by 3.3 percent in
(ii) the risk of reduced capital inflows because 2020, while Latin America and the Caribbean, the region
of the perceived economic effects of pandemic most severely affected, fell by 7.0 percent, more than double
resurgence in these countries or because of the global decline. Long-term economic damage from the
stronger performance and thus higher interest pandemic is projected to be much greater in low- and mid-
rates in mature market economies, and dle-income countries (excluding China) than in advanced
(iii) the risk of lasting economic damage economies. Relative to pre-pandemic projections, the latest
from the pandemic, exacerbating poverty and IMF projections for real gross domestic product (GDP) in
inequality among and within countries. the year 2024 are down less than 1 percent for advanced
6 Sovereign Debt and Financing for Recovery AFTER THE COVID-19 SHOCKGROUP OF THIRT Y 7
economies, but nearly 8 percent for developing economies capital outflows from the emerging markets. Outflows have
in Asia (excluding China), more than 6 percent in Latin since subsided, but countries remain vulnerable to rapid
America, and more than 5 percent in Sub-Saharan Africa. changes in market sentiment. They face higher interest rates
The start of the pandemic froze trade, investment, and with larger debt stocks and new financing needs, against the
remittances, and prompted dramatic capital outflows from background of higher expected global growth. The prospect
developing countries (Figure 2). However, large-scale asset of positive spillovers from higher global growth could help
purchases and other extraordinary domestic measures in mitigate the fragility, but the situation for many emerging
the advanced economies prompted investors to search for and frontier economies remains precarious on balance.
higher returns in the emerging markets. Spillovers from The risk of permanent damage is high, with greater
mature market stimulus helped avoid more severe sov- and more entrenched inequality among and within coun-
ereign debt market disruptions in emerging and frontier tries, years of lost growth, more poverty and social strife.
markets. Portfolio capital flows began to recover over the Lockdowns at home and abroad hit the hardest in countries
summer, as governments borrowed on an unprecedented with younger and more low-skilled workers, poor digital
scale. General government debt rose by 16 percent of GDP infrastructure, and those that rely on tourism. They saw
in mature market economies, and 10 and 5 percent of GDP, the steepest declines in output, productivity, and labor force
respectively, in middle- and low-income countries. participation. Children in low-income countries missed
The IFIs had sounded the alarm about emerging market nearly five times more school days—and those in emerging
debt on the eve of the pandemic, against the background market countries missed three times more—than children
of historically low interest rates expected to last for a long in advanced economies. The potential damage to a new gen-
time. The start of mass vaccination and a new round of fiscal eration of workers raises the risks of political turbulence,
stimulus in the United States bolstered recovery hopes and trade protectionism and other international tensions, and
shifted interest rate expectations in early 2021. A sharp future financial crises as countries struggle with higher debt
increase in U.S. Treasury yields in February prompted burdens and other legacies of the pandemic. Mitigating the
FIGURE 2
Capital Flows to the Emerging Markets
Daily cross-border portfolio flows, six-week moving average, US$ billion
1.5
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
Jan 1 Feb 1 Mar 1 Apr 1 May 1 Jun 1 Jul 1 Aug 1 Sep 1 Oct 1 Nov 1 Dec 1 Jan 1 Feb 1 Mar 1 Apr 1
2020 2021
EM debt (excluding China) China equity EM equity (excluding China)
Source: Institute of International Finance8 Sovereign Debt and Financing for Recovery AFTER THE COVID-19 SHOCK
damage and preventing structural changes from setting in indicating persistent distress and a high risk of default. Some
will take substantial investment. officials in Argentina have advocated for rescheduling the
Market access and borrowing costs have varied widely country’s payments to the IMF. Argentina was the largest
among developing countries. Six countries have defaulted user of IMF credit at the start of 2021, followed by Egypt,
since the start of the pandemic,4 but only two defaults—Belize Pakistan, Ukraine, and Ecuador.
and Ecuador—were directly attributable to it. In November The ongoing resurgence of COVID-19, with more
2020, Zambia became the first and so far the only African contagious, deadly, and vaccine-resistant new variants,
sovereign to default on its Eurobonds. In February 2021, it disproportionately harms low- and middle-income coun-
joined Chad and Ethiopia in seeking debt relief under the tries, where most people are not expected to be vaccinated
Common Framework. After nine months of no market bor- before 2022. The new variant that emerged in Brazil is
rowing by a Sub-Saharan African sovereign, Côte d’Ivoire now widespread in South America. It is infecting younger
sold new Eurobonds in November 2020 in an oversubscribed people, straining the public health infrastructure, and dis-
offering. Benin followed in January 2021; however, borrow- rupting the region’s economy anew. Infections and deaths
ing in the region remains below pre-pandemic levels (Figure have since surged in India, rapidly overwhelming the
3). In late March 2021, secondary market spreads for Côte health system. The difference in pandemic intensity across
d’Ivoire and Benin were just under 600 basis points, indicat- regions is driving much of the difference in the outlook for
ing market perceptions of continuing vulnerability. Credit growth, with Latin America initially suffering the most on
ratings for emerging and frontier market economies tell both dimensions among the emerging markets, but more
a similar story: after a flood of downgrades in 2020, their recently eclipsed by the surge in South and Southeast Asia.
pace has slowed in 2021, but the trend has not reversed. The Countries with fewer resources will continue to suffer
first quarter of 2021 brought just two upgrades (Benin and enormous damage and will have more trouble containing
Serbia) against fifteen downgrades, while average ratings the disease. Vaccine distribution has been uneven within
for Africa and Latin America have sunken to historic lows. and among countries, fueling public health and political
Public debt in Brazil and South Africa was on track to top risks. Wealthy economies have secured most of the early
100 percent of GDP, even before Brazil had suffered the latest vaccine supply; low- and middle-income countries are
devastating wave of COVID-19. Six months after their high- months behind in gaining access to vaccines and standing
profile debt restructurings, Argentina’s and Ecuador’s foreign up vaccine administration systems. COVAX5 vaccine deliv-
bonds traded at spreads above 1500 and 1200, respectively, ery and multilateral development bank (MDB) lending are
FIGURE 3
Sub-Saharan African Bond Issuance, as of April 2, 2021
US$ billion
25
20
15
10
5
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021F
Pre-pandemic (to 2019) January–February 2020 Post-February 2020
Sources: J.P Morgan, Bloomberg, IIF
4 Argentina, Belize, Ecuador, Lebanon, Suriname, and Zambia.
5 COVAX, the COVID-19 Vaccines Global Access, is a global initiative aimed at equitable access to COVID-19 vaccines led by UNICEF, Gavi, the Vaccine
Alliance, the World Health Organization, the Coalition for Epidemic Preparedness Innovations, and others.GROUP OF THIRT Y 9
only beginning to have an impact (Figure 4). Worries about and financial market shocks, and deeper, longer-lasting
supply disruptions and potential export bans persist. humanitarian and economic harm.
Vaccination delays and inequities harm everyone. They A widespread resurgence of the pandemic presents
create conditions for new and dangerous virus variants to governments in low- and middle-income countries with
mutate and spread, triggering new lockdowns, more trade unappealing policy choices. A temporary rise in inflation
FIGURE 4A
Projected Vaccine Rollout Times
Richer countries with Most other Most middle-income Some middle-income and
priority supply deals developed countries, countries, including most low-income countries
and/or small populations Russia, Brazil India and China (reliant primarily on COVAX)
Dec 2020 Regulatory approval Regulatory approval
Jan 2021 Regulatory approval
Priority groups Regulatory approval
Feb 2021
Mar 2021 Priority groups
Apr 2021
May 2021
Other vulnerable groups Priority groups Priority groups
Jun 2021
Jul 2021 Other vulnerable groups
Aug 2021
Sep 2021
Oct 2021
Other vulnerable groups
Nov 2021
Rest of population
Dec 2021 Other vulnerable groups
Jan 2022 Rest of population
Feb 2022
Mar 2022
Apr 2022
May 2022
Jun 2022 Rest of population
Jul 2022 (and other vulnerable groups)
Aug 2022
Sep 2022
Oct 2022
Nov 2022
Dec 2022
Jan 2023
Feb 2023 Back to normal Rest of population
Mar 2023
Back to normal
Apr 2023
May 2023
Jun 2023
Jul 2023 Back to normal
Aug 2023
Sep 2023
Oct 2023
Nov 2023
Dec 2023
Jan 2024 Back to normal
Source: Economist Intelligence Unit10 Sovereign Debt and Financing for Recovery AFTER THE COVID-19 SHOCK
FIGURE 4B
Vaccine Purchases by National Income Category
Confirmed number of vaccine doses purchased by countries in income group, as of March 4, 2021 (billions)
COVAX 1.12
Low income 0.67
Lower middle income 0.60
Upper middle income 1.26
High income 4.58
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
Source: Duke Global Health Innovation Center
may be unavoidable if policymakers want to keep as many also have foreign currency bonds coming due, issued before
workers employed as possible while protecting those whose and during the pandemic. African governments alone must
jobs are destroyed by pandemic business closures. Central refinance or repay US$100 billion over the next decade.
banks have already raised policy rates in response to rising In Brazil, shrinking maturities and rollover pressures
bond yields in advanced economies and to rising domestic potentially complicate the recovery: the government had
inflation that is driven in part by supply chain disruptions to repay or refinance an unprecedented 3.7 percent of GDP
and other pandemic-related bottlenecks. Limited fiscal space in domestic government debt that was due in April alone.
has to focus on addressing the public health shock and mea- Fifteen countries have debt payments between 25% and
sures to protect workers and businesses. Pandemic-induced 60% of their revenues due in 2021, according to Moody’s.
cuts in education, infrastructure, and climate resilience For countries with limited market access, China had
expenditures threaten to inflict lasting damage and exacer- offered an alternative to multilateral development funding
bate inequality. The strong global support we are proposing (largely via the Belt and Road Initiative). However, financ-
would also help to avoid excessive near-term austerity. ing from China peaked in the middle of the last decade,
It is possible that successful vaccination programs in and has fallen by more than three-quarters since. Loss of
advanced economies will boost demand for exports from funding from China, without a replacement on the horizon,
low- and middle-income countries without sparking signifi- would be especially damaging for low-income countries,
cant inflation and higher interest rates that would reduce where it is already a large creditor (Figure 6).
capital inflows. More likely is a combination of stronger
growth in advanced economies along with somewhat
higher interest rates. Countries with strong trade links to DEBT POLICY DEVELOPMENTS
the United States should benefit from a strong U.S. recov- DSSI has delivered far less relief than projected, with major
ery, but other countries may suffer from reduced access to creditors and debtors refusing to participate, and a number
capital, especially if they rely on foreign-currency financing. of vulnerable countries ineligible. The initiative, now
Debt stocks have grown sharply for countries across the extended through the end of 2021, allowed 46 out of 73
income spectrum, but especially for middle-income coun- eligible low-income countries to postpone US$5.7 billion
tries. Many face spikes in scheduled debt repayments in in official bilateral debt payments due in 2020 and 2021,
the next five years (Figure 5). Those that borrowed in local compared to US$12 billion projected at the outset. Most of
currency in their domestic markets to manage the impact of the shortfall is attributable to fewer governments applying
the pandemic tried to reduce borrowing costs by shrinking for relief, applying later than expected, and receiving less
maturities and issuing floating-rate debt. Domestic banks cash flow relief than expected. No private creditors have
in the emerging markets absorbed 60 percent of all new participated in DSSI, although some Chinese lenders have
sovereign issuance in 2020, according to the IMF, raising rescheduled their claims bilaterally. The current debtor
concerns about inflation. Many emerging market sovereigns participation level (Figure 7) is likely the ceiling for DSSI.GROUP OF THIRT Y 11
FIGURE 5
Debt Repayment Profiles for Selected Sovereigns
KENYA ZAMBIA
10,000 2,500
9,000
8,000 2,000
7,000
6,000 1,500
Millions
Millions
5,000
4,000 1,000
3,000
2,000 500
1,000
0 0
21
27
28
29
ed
22
23
24
25
26
21
22
23
24
25
26
27
28
29
ed
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
los
los
sc
sc
di
di
Un
Un
Kenyan Shilling Euro Zambian Kwacha Euro
United States Dollar Special Drawing Rights United States Dollar Special Drawing Rights
ETHIOPIA REPUBLIC OF CONGO
1,600 800
1,400 700
1,200 600
1,000 500
Millions
Millions
800 400
600 300
400 200
200 100
0 0
21
22
23
24
25
26
27
28
29
ed
21
22
23
24
25
26
27
28
29
ed
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
los
los
sc
sc
di
di
Un
United States Dollar Euro Central Africa CFA Franc Euro Un
Special Drawing Rights United States Dollar Special Drawing Rights
LAOS OMAN
600 16,000
14,000
500
12,000
400 10,000
Millions
Millions
300 8,000
6,000
200
4,000
100 2,000
0 0
21
22
23
24
25
26
27
28
29
21
22
23
24
25
26
27
28
sc 9
ed
20
2
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
los
di
Un
Thai Baht Euro Omani Rial
United States Dollar United States Dollar
Source: Bloomberg12 Sovereign Debt and Financing for Recovery AFTER THE COVID-19 SHOCK
FIGURE 6
Public and Publicly Guaranteed Debt Stock for DSSI-eligible Countries
US$ billion
600
500
400
300
200
100
0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Other private creditors China official bilateral
Bonds Paris Club official bilateral
Other commercial banks Other MDBs
Other official bilateral IMF
China commercial banks World Bank
Source: World Bank International Debt Statistics
Several countries that participated in DSSI in 2020 have likely to be a lower-middle-income frontier market govern-
decided not to renew participation in 2021. ment preoccupied with maintaining its newly won market
DSSI suffers from design flaws that may also hobble access. The slightest prospect of a credit downgrade or
the G-20 Common Framework as it takes off the ground. reputational fallout is often enough to dissuade such a gov-
DSSI does not have any mechanism for distressed sovereign ernment from seeking the temporary relief on offer under
debtors to seek comparable relief from non-participating DSSI if there is any way it could still make the next debt
creditors. Without a bankruptcy court, statutes, or trea- payment. An extra effort to pay in a global pandemic can be
ties to compel it, all creditor participation in sovereign justified for a government with no liquidity or sustainabil-
restructuring is generally voluntary. As DSSI is a G-20 ity concerns, but DSSI design does not distinguish between
commitment and formally covers all their official bilateral such a government and a deeply troubled one unwilling
lending, it has no mechanism for coordinating non-G-20 to deal with its debt overhang. Both are eligible based on
creditors. The statement launching DSSI took the extra step national income, neither is bound by an IMF debt sustain-
of emphasizing the voluntary character of private sector ability analysis, and both are free to use the funds saved
involvement and committed not to inflict present value from official creditors participating in DSSI to pay non-
losses on participating creditors. This shaped the perception participants. It is entirely up to them—their reputations are
that private sector involvement in debt relief efforts was on the line. Nigeria and Senegal are among the large eligible
optional, reinforced in DSSI implementation. borrowers to rule out debt suspension, publicly character-
DSSI design made it costly for sovereigns to approach izing recourse to DSSI as a sign of weakness and a threat
private creditors, despite repeated communique pleas for to market access. Some academic studies have suggested
private sector involvement. The marginal DSSI debtor is that DSSI could reduce borrowing costs for participatingGROUP OF THIRT Y 13
FIGURE 7
DSSI Participation
50
45
40
35
30
25
Number of countries participating in DSSI
20
15
10
5
0
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
2020 2021
Source: Paris Club, World Bank DSSI annual and biannual data
debtors6; however, it is hard to interpret the findings in light creditor committee, based on input from the IMF and the
of limited debtor and creditor participation so far. World Bank.
DSSI eligibility criteria have not expanded beyond the The principal near-term benefit of the framework is a
poorest IDA borrowers, and continue to exclude countries coordination process among Paris Club and non-Paris Club
like Sri Lanka, which remains among the most vulner- creditors, notably China as the largest bilateral official cred-
able sovereign borrowers, but narrowly misses the income itor in many vulnerable countries. Countries that apply for
threshold. The Common Framework inherits DSSI eligibil- debt treatment under the Common Framework must enter
ity criteria and March 2020 cut-off date. A study published into a non-binding memorandum of understanding that
by the UNDP estimates that these criteria exclude 23 vul- would effectively extend Paris Club procedures to all their
nerable countries with US$387 billion in sovereign debt medium-term official bilateral debt contracted before the
payments through 2025—or nearly one-third of all vulner- March 24, 2020, cut-off date (Figure 8). On April 15, 2021,
able countries and two-thirds of the debt service due.7 Chad’s Common Framework creditors officially met for the
The G-20 Common Framework, announced in first time, revealing the outlines of a process taking shape. A
November of 2020, goes beyond DSSI in several respects, creditor committee co-chaired by France and Saudi Arabia
and could become a platform for more durable institutional was formed to support the negotiation process, but has
reform. It contemplates debt reduction for countries with no authority to impose terms on any creditor or to make
unsustainable debt (describing it as a last resort), based on concessions on their behalf. The post-meeting statement
IMF and World Bank analysis, and expands the Paris Club includes commitments to participate by China and India,
process to include non-Paris Club creditors, with express which hold some of the larger official claims on Chad. Libya
commitment to extend the debtor’s comparability of and China are Chad’s largest official creditors, followed by
treatment undertaking to creditors beyond the Common France and India. The Paris Club holds less than five percent
Framework. The scope and extent of relief would be nego- of Chad’s debt. Chad owes almost half of its external debt
tiated case-by-case between the debtor and an official to one creditor, the commodities firm Glencore, which also
6 Lang, Presbitero, and Mihalyi 2020
7 Jensen 202114 Sovereign Debt and Financing for Recovery AFTER THE COVID-19 SHOCK
FIGURE 8
Debt eligible for the DSSI and Common Framework (US$ million)
45,000
40,000
35,000
30,000
25,000 Common
Framework
20,000
15,000
10,000
5,000 DSSI
0
April–May Jun Jul Aug Sep Oct Nov Dec Jan Feb
2020 2021
Source: World Bank DSSI annual and biannual data; debt eligibility cut-off date of March 24, 2020
accounts for nearly all of the government’s external com- Inter-creditor conflicts have threatened to disrupt DSSI
mercial debt. Some of the debt to Glencore is syndicated; and Common Framework treatment in other vulnerable
some is backed by oil and would have a priority claim on low-income countries. Zambia negotiated a six-month inter-
part of the country’s oil revenues. Chad had restructured est payment holiday with the China Export-Import Bank
Glencore debt once before, in 2018. and China Development Bank in late 2020, deferring up to
G-20 statements since the launch of the framework, reit- US$800 million in payments, although agreement details
erated after the first meeting of Chad’s creditor committee, have not been disclosed, and reports that Zambia had to
insist that Common Framework beneficiaries are expected clear arrears to the same lenders muddle relief estimates.
“to seek from all ... other bilateral creditors and private Zambia then defaulted on a US$43 million Eurobond
creditors a treatment at least as favorable as the one agreed” payment in November after bondholders demanded to
with its creditors. If properly implemented, such statements know more about its debt to China as a condition to defer-
would extend the Paris Club comparability principle to the ring US$120 million.8 Zambia’s sovereign debt to Chinese
Common Framework, and minimize differences between lenders slightly exceeds its outstanding Eurobond stock
official and private debt treatment. However, official pro- (Figure 9). While Zambia’s government negotiated its IMF
nouncements on comparability are replete with broadly program in January 2021, its state-owned mining company
drawn carve-outs and deference to the creditors’ domestic took over a 73 percent stake in Mopani Copper Mines from
legal constraints. Such tentative commitment may be justi- Glencore, to save mining jobs. It promised to pay Glencore
fied by the novelty of the Common Framework; however, US$1.5 billion at LIBOR+3%, with Glencore retaining
the record of official exhortations under DSSI also feeds the right to buy the mine’s copper output and receiving an
growing skepticism about the Official Sector's ability to escalating share of mine revenues until the loan is repaid.
enforce comparability. The depth and breadth of each credi- Unlike Zambia, Angola has pledged to continue
tor’s participation and the compliance pull of the creditor paying its bondholders while negotiating with the China
committee process will emerge in practice over time. Development Bank and the China Export-Import Bank,
8 If it had gone forward, the agreement would have been the first and only private sector debt restructuring under the DSSI.GROUP OF THIRT Y 15
FIGURE 9
External Sovereign Debt Stock Composition, Selected Commodities Exporters
ZAMBIA ANGOLA ECUADOR REPUBLIC
- OF CONGO
13% 15%
16%
24% 28%
29% 3% 5%
1%
42% 5%
22%
14%
65%
5%
25%
17% 48%
19%
4%
Multilateral
Sovereign bonds
Sovereign loans from other non-bondholder private creditors
Official bilateral (non-China)
Sovereign loans from China (bilateral, commercial banks, and other)
Source: World Bank International Debt Statistics, data to 2019
estimated to hold US$15 billion and US$5 billion in claims challenge posed by undisclosed collateralized lending for
on the government, respectively. Angola’s Paris Club credi- policy formulation and credit assessment. Arrangements
tors agreed in January 2021 to suspend its debt payments such as Zambia’s “equity-for-debt swap” and Chad’s and
under DSSI, with total potential savings of US$3 billion Zambia’s export revenue commitments to Glencore,
through June 2021. described above, are more common than previously recog-
Ethiopia was among the first to seek debt relief under nized. A recent study of contracts between Chinese lenders
the Common Framework and stands to benefit dispropor- and governments in developing countries found more loans
tionately from the initiative’s extension of bilateral official effectively secured by revenue accounts, some unrelated to
creditor coordination beyond the Paris Club: its top three the underlying project, than in comparable contracts with
creditors, China, India, and Turkey are all non-Paris Club other official or commercial lenders. A large portion of the
bilateral lenders. It reached a staff-level agreement with the loan sample also included expansive promises of confiden-
IMF in late February that contemplates debt reprofiling. tiality, except where disclosure is required by law.11
Ethiopia’s bond prices plunged on the announcement of U.S. court orders in New York and Washington, D.C.
its Common Framework application; Fitch9 and S&P10 blocked Guatemala’s US$16 million bond coupon payment
downgraded its debt, citing expectations of comparability in November to enforce an International Centre for
far ahead of external vulnerabilities and military conflict. Settlement of Investment Disputes (ICSID) arbitration
Reports that formally and informally collateralized award. Investors had initiated arbitration over electrical
sovereign debt has grown, particularly among low-income rates in 2009 and secured the US$37 million award in 2020.
countries, raise policy concerns. A joint IMF-World Bank In November, U.S. courts agreed to bar Guatemala’s fiscal
report for the G-20, issued on the eve of the pandemic, agent bank in New York from transferring the government’s
highlighted the risks associated with collateral pledges funds to its bondholders. The enforcement strategy follows
outside the context of revenue-generating projects, and the the path of earlier successful lawsuits against Argentina in
9 Fitch Ratings 2021
10 Reuters 2021
11 Gelpern et al. 202116 Sovereign Debt and Financing for Recovery AFTER THE COVID-19 SHOCK New York and London, and against Peru and Nicaragua in features of statutory sovereign bankruptcy to compel Brussels, all of which froze bond payment flows. To avoid private sector involvement in sovereign debt restructur- bond default in the middle of a pandemic, Guatemala paid ing. The bill would allow sovereign debtors to modify debt the arbitration award in full. Beyond the successful enforce- contracts governed by New York law by a supermajority ment strategy, the incident highlights the importance of vote. It would also grant priority to new borrowing, require investment claims in some sovereign debt stocks. Investors a debt audit before restructuring, limit speculative inves- in Venezuela began to enforce the arbitration awards against tors’ litigation recovery, and empower financial regulators the government long before there could be a bond restruc- in New York State to oversee aspects of debt renegotiation. turing. Holders of arbitration awards compete for the same Civil society groups have separately proposed measures to assets, and are likely to use the same enforcement tactics as limit creditor recovery and insulate sovereign debtors from sovereign debt investors and judgment holders. Regardless enforcement, modeled after similar legislation in the U.K. of the merits of the underlying claim, commandeering Regardless of the bill’s prospects, the impetus to legislate payment intermediaries to enforce sovereign debt is disrup- is likely to persist and evolve; lack of visible private sector tive for the payment system, and damaging for the country. participation in DSSI and the Common Framework fuels In February 2021, New York State legislators announced this and similar initiatives. plans to introduce a bill12 that would replicate certain 12 Gladstone 2021
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