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Debt relief extension ‘not enough’ as private sector remains deaf to G20 pleas

The G20 announced a six month extension to the debt suspension its members agreed to in April, yet it could do nothing but petition private sector creditors to take part — an appeal that appears to be falling on deaf ears

A six month extension to the G20’s Debt Service Suspension Initiative agreed on Wednesday will not be enough to deal with crippling debt in developing countries, while the lack of private sector participation is blunting its effectiveness, analysts and policymakers have warned.

IMF managing director Kristalina Georgieva issued a call on Wednesday to “deal with debt”, warning global public debt would reach a record 100% of GDP in 2021. In March, the G20 began the DSSI, under which official bilateral creditors offered to suspend debt payments from 73 poor countries between May 1 and December 31.

On Wednesday, the group extended the initiative by six months, saying it would examine the need for another extension before next year’s Spring Meetings.

World Bank president David Malpass called the deal a “ray of hope” as it has increased fiscal resources for more than 40 countries, but that it was “not nearly enough” progress.

“Some core DSSI-related problems are still unresolved, notably lack of participation by private creditors and incomplete participation by some official bilateral creditors,” he said.

Georgieva said that, “unfortunately, we have not yet seen [private sector participation] happening”.

The G20 called the absence of progress with private creditors disappointing, while Saudi finance minister Mohammed al Jadaan, chairing the G20 meeting, said private investors “have benefited from high yields for an extended period of time” and it was “about time during this crisis that [they] participate”.

There was a similar call last week from the 54 finance ministers of the Commonwealth, while Oxfam’s international debt policy lead, Jaime Atienza, said it was “scandalous that powerful private lenders and multilateral institutions like the World Bank are still excluded”.

“Private sector debt still has no independent mechanism for review,” said Atienza. “Poor countries are continuing to repay debts to rich banks and hedge funds, instead of investing in their Covid-19 responses.”

DSSI vs market access

The Institute of International Finance (IIF) attempted to provide a framework to facilitate private creditor participation in May, but to no avail.

The G20 statement encouraged private participation “when requested by eligible countries”, but countries have been reluctant to ask. Of the 43 countries that have participated in the DSSI, only three have approached private creditors, noted Georgieva.

“There continues to be a push for private sector involvement in debt relief, but it has to be on a case-by-case basis,” Graham Stock, head of EM sovereign research at BlueBay, told GlobalMarkets. “Calls for broad standstills overlook that countries are seeking to build a track record of debt service and don’t want to restructure if they can avoid it.”

Bondholders point out that Ecuador and Argentina restructured billions of dollars of bonds relatively quickly this year, while other issuers like Belize, Suriname and Zambia have requested payment holidays outside of the DSSI.

Reza Baqir, governor of the State Bank of Pakistan, told this week’s IIF meetings that the DSSI had been “very useful”. However, he warned that his country does “not want to be put in a position where we have to choose between market access and the DSSI”.

“There’s a danger that this will happen if there continues to be a push towards private creditor inclusion,” said Baqir. “Pakistan wants to be able to tap markets. It needs to be clear what you’re getting [from participation] and what you’re putting at risk.”

In May, Pakistan requested official debt relief under the DSSI, which triggered a review for downgrade on its B3 credit rating from Moody’s. The agency returned Pakistan to stable outlook in August when it saw private creditors were not at risk. But Baqir warned that 40% of eligible countries had not participated in the DSSI partly because of rating risks.

Also at the IIF, Patrick Ngugi Njoroge, governor of the Central Bank of Kenya, encouraged the participation of Russian and Chinese lenders in the initiative, but said he thought differently about private sector involvement.

“[Kenya has] done a lot to get into the non-concessional borrowing space and we continue to dip into capital markets as we see fit,” he said. Kenya is eligible for the DSSI, but has not requested relief.

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