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Debt relief: normal rules should not apply


Sovereign defaults are part of the territory for emerging market investors but even by the standards of previous crises, surely nothing compares to the economic catastrophe that is rapidly engulfing large parts of the developing world.

Events have moved fast and it is still dizzying to think that fund managers who were enjoying record inflows in January are now having to contemplate offering debt relief to the borrowers they invested in.

Investors should not be in denial. So far, in this crisis, calls for debt relief have centred on official institutions and bilateral creditors. But calls for private creditors to take a part in these exercises, which could span the EM universe, will only grow from now.

Thrashing out what form wide scale debt relief takes will be a hard task in the bond markets. Yet the unprecedented nature of the Covid-19 and oil price shocks demands radical action and creative thinking.

Bondholders should not immediately rush to the exit door on talk of debt standstills and relief but engage with the concept with open mindedness. Right now, further stress in the bond markets is not in anyone's interest, especially when there is room to plot a constructive path to recovery for those EM sovereigns in need.

Investors will need help though. It is not in their job description to solve a problem as large as multi-sovereign debt relief. This will require leadership, guidance and consultation from officials — not to mention swiftness. 

A clear message also needs to be formulated for end investors, as fund managers dealing with a flood of redemptions will be limited in what they can do to help relief efforts.

The path ahead looks bumpy but there is no need for the wheels to fall off if all those with a stake buckle up and hold tight.