Last week the IMF's Managing Director Kristalina Georgieva published a blog post titled Reform of the International Debt Architecture is Urgently Needed. She and her coauthors explain that the increases in debt levels related to the pandemic will hit emerging market economies especially hard. "While many advanced economies still have the capacity to borrow, emerging markets and low-income countries face much tighter limits on their ability to carry additional debt."
"Indeed, about half of low-income countries and several emerging market economies were already in or at high risk of a debt crisis, and the further rise in debt is alarming. Just as they are starting to recover from the pandemic, many of these countries could suffer a second wave of economic distress, triggered by defaults, capital flight, and fiscal austerity. Preventing such a crisis can make the difference between a lost decade and a rapid recovery that puts countries on a sustainable growth trajectory. As IMF research has recently shown, waiting to restructure debt until after a default occurs is associated with larger declines in GDP, investment, private sector credit, and capital inflows than preemptive debt restructurings."
The blog introduces a report, The International Architecture for Resolving Sovereign Debt Involving Private-Sector Creditors. It evaluates the existing debt restructuring framework and proposes reforms such as enhancing collective action clauses to improve coordination among bondholders and increasing transparency around debt amounts, terms, and holders. It ends with a warning about the scale of COVID-related debt:
"Finally, should a COVID-related systemic sovereign debt crisis requiring multiple deep restructurings materialize, the current resolution toolkit may not be adequate to address the crisis effectively and additional instruments may need to be activated at short notice ... These instruments raise significant legal and policy issues, would require careful consideration, and would be expected to be used only as a last resort and on a time-bound basis to address the unique challenges posed by the crisis."
FT: "The magnitude of the economic shock from the Covid-19 pandemic has badly weakened the often already fragile public finances of many poor and emerging countries. While welcome steps have been taken to avoid immediate liquidity crises, the pandemic's drawn-out nature means we are only at the start of the financial problems it will leave behind ... The rationale for all bankruptcy arrangements, after all, is precisely this: it can be in the interest of creditors, too, to restructure payment obligations when changed economic circumstances make these more onerous than expected."
The Guardian: "Georgieva has already made the case for a new debt framework and that is indeed sorely needed. Debt relief is no longer simply a question of getting a bunch of rich western governments to agree to a deal: it now requires the involvement of private sector creditors, such as BlackRock, and Beijing."