Creditors reject G20 call for emerging market debt relief
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Investors rejected calls by the group of major G20 economies to allow emerging economies to suspend debt repayment, an early sign of the difficulty of getting private creditors to agree collectively and voluntarily on relief measures coronaviruses.
The G20 on Wednesday urged private creditors to participate in its plan to provide temporary debt relief to low-income countries until the end of the year.
Zambia and Ecuador have already been forced to seek debt restructuring, and many more are expected to be continued given the scale of the economic and financial shocks caused by the virus epidemic.
But although investors told the FT the flexibility was warranted given the grim economic prognosis for many emerging economies, they warned that a uniform and voluntary agreement was not achievable in practice.
“There is no doubt that what these countries will need is cash flow relief,” said Robert Koenigsberger, chief investment officer of investment firm Gramercy Funds Management. “The question is, what is the best way to achieve this. “
Investors should think of each country independently in terms of debt relief, according to Marcelo Assalin, head of the emerging markets debt team at William Blair.
“A one-size-fits-all solution is not appropriate,” he said.
Mohamed El-Erian, chief economic adviser at Allianz and senior adviser at Gramercy, also opposed a “top-down” solution, arguing instead for a country-specific approach.
“History suggests that the best approach is an orderly and willful approach,” he said. “Ordered so that you don’t delay economic and financial recovery, and voluntary, so that you get good buy-in and people continue to have incentives lined up.”
G20 countries have agreed to freeze repayments on bilateral government loans to low-income countries until the end of the year, and the Institute of International Finance, an industry club, has also urged creditors private parties to agree to “voluntary” moratoria if some so request. of the poorest countries hardest hit by the rapid spread of Covid-19.
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Yet without some sort of legal mechanism to force creditors to agree to a moratorium, getting enough to support a debt moratorium would be a challenge, investors warned.
In past debt restructurings, some bondholders have refused to accept changes in their payments and have taken legal action. This could be a thorny issue to resolve, even if a large majority of investors come to agreement on the need for debt relief, fund managers and analysts say.
“At this point, governments have stronger priorities regarding the management of the coronavirus epidemic,” Mr. Assalin said. “The last thing they want is to go to court with the bondholders and be involved in a long legal process.”
One potential solution offered by a group of finance and legal academics is for countries to channel debt payments into credit facilities put in place by the World Bank or a regional development bank, which countries could then use to essential expenses.
This would constitute a de facto status quo, but would not technically constitute a defect. In the meantime, creditors would benefit from the legal protection enjoyed by organizations such as the World Bank, and once the crisis is over, a decision could then be made on whether or not a full debt restructuring is necessary.
“Any kind of default would be extremely damaging and costly in the short term,” said Patrick Bolton, a finance professor at Columbia Business School and one of the proponents. “It’s a simple way to align commercial creditors with the public sector. It’s about buying a few months or a year.