The latest failure of debt restructuring talks between Ethiopia and its bondholders is an unwelcome but not unusual outcome. Moreover, it highlights a glaring deficiency in the process of restructuring sovereign debt under the G20’s Common Framework: the lack of transparency between creditors.
Talks between the government and an ad hoc committee of bondholders over the past two and a half weeks has failed to yield an agreement, after a back and forth over how to restructure the country's $1bn 6.625% December 2024s, its only Eurobond.
Bondholders and governments failing to agree is neither new or unusual in debt restructuring talks, even if it is frustrating to all concerned and damaging to a country’s economic prospects, particularly when it is taking as long as Ethiopia's process. The country defaulted 22 months ago and first signalled it wanted to restructure in 2021.
Ethiopia has made progress with other lenders, agreeing a memorandum of understanding with official creditors in July.
This week's failure with bondholders highlights a weakness in the G20’s Common Framework, rolled out during the Covid-19 pandemic to try and streamline the debt restructuring process.
One key tenet of the Common Framework is comparability of treatment between: that no one set of creditors will receive a better deal than the others. This is a fair aim, and few would contest the principle. With provisional terms agreed with official creditors, Ethiopia made it clear to bondholders that any deal would have to uphold the idea.
But as the bondholder committee said on Tuesday, private creditors do not get to see the terms of agreements with other creditors before or during their own talks. This is a major weakness in the Common Framework and is delaying Ethiopia's restructuring, as it has in debt reworks in the last few years.
It is very difficult for private creditors such as bondholders to make suitable proposals when they do not know what has been agreed with other lenders, such as official creditors. They are in many ways entering talks blindfolded.
Nobody is suggesting that sovereigns and official lenders publish the full terms of their agreements in the public domain. That is not necessary. But they could share them privately with bondholders, for example, for the sole purpose of giving them some idea of what to aim for. It might not even have to be the full version, just the basics so they know where to start.
The G20 set up the Common Framework to try and speed up these complex and arduous restructurings but this lack of transparency between creditors means private lenders are hamstrung.
In Ethiopia’s case, bondholders might not be that much of a priority. The $1bn bond is a tiny part of its near $30bn external debt. It has used the Eurobond market once, and may have no plans to do so again, and so it can press on with official and bilateral reworks without having to worry too much about bondholders.
But the problem for bondholders of not having the starting information needed is one that will crop up in every restructuring. It needs to be fixed, otherwise restructurings will drag on and on, just as Ethiopia’s is, and just as Zambia’s did until a belated deal in 2024.
The Common Framework is an architecture that, if judged by the duration of restructurings since its incarnation, has not been entirely successful. That is in part because one of the cornerstones, comparability of treatment, is hard to achieve due to of a lack of cooperation and information sharing between creditors, leaving private lenders in the dark.