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Emerging Markets

Common Framework not enough in face of rising debt distress

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Progress is slow on G20 Common Framework initiative as developing countries feel the squeeze and so-called middle income economies do not qualify

The need for a framework to enable stressed countries to swiftly restructure their debt is becoming more urgent, but the G20’s Common Framework is not up to the task in its current state and many countries who may need help are not eligible.

A paper from the UN Development Programme this week identified 54 developing economies as having “severe” debt problems. Though only 3% of the global economy, the countries account for 18% of the population and over half the people living in extreme poverty.

“As interest rates rise to tackle inflation, we could see a number of disorderly defaults in developing countries,” said Eric LeCompte, executive director of the Jubilee USA Network. “The financial system does not have the tools to deal with multiple debt crises.”

The G20 Common Framework for debt restructuring was conceived in November 2020 to make it easier for the 73 low-income countries to achieve debt relief. But only Zambia, Chad and Ethiopia have signed up, and none has completed its restructuring negotiations.

Marcello Estevao, the World Bank’s global director for macroeconomics, trade and investment, said he was “disappointed” and that it was “puzzling” why there was so little demand for the framework.

“Some countries say: ‘Oh, let’s see how Zambia goes, then we’ll apply’, or ‘I don’t want a blemish on my financial reputation’, but this is denying reality, as some of the countries that would benefit from debt restructuring are in bad shape,” he said.

But LeCompte said there were no signals from the G20 that would “encourage borrowers” to use the framework, while IMF managing director Kristalina Georgieva said the Fund was “pressing for a more effective debt resolution mechanism” and called for the Common Framework to become more “predictable”.

“It is like you are entering a tunnel,” said Georgieva. “You do not know where the other side of the tunnel is, because the way we bring all creditors [in] is lumpy.”

In August, Chinese lenders expressed their support for Zambia’s restructuring, which several observers saw as a significant step forward. Estevao said he was hopeful the process would “set a very good example for how the common framework can work well”.

But one bond investor who has participated in several sovereign restructurings said he “strongly disagreed” that Zambia was a sign of success.

“It’s been two years and there’s still no deal,” he said on the sidelines of the Annual Meetings. “The median time for a debt restructuring negotiation is a year and a half. Objectively we can say that the Common Framework has slowed things down in Zambia.”

 

SQUEEZED MIDDLE

Sri Lanka became the most recent EM sovereign bond issuer to default on sovereign debt in April, suspending all international bond payments as it suffers a painful economic downturn. But the country cannot use the framework as, under World Bank criteria, it is a middle-income, not a low-income, country.

“This is one way [the framework] can improve,” said Estevao. “It can expand its parameters and let more countries qualify for treatment.”

Georgieva said the IMF was “looking for ways” to expand such “donor co-ordination” to middle-income countries. Several crisis-ridden middle-income countries have campaigned for their needs to be better recognised, as their classification means they do not have the same access to international support as poorer countries.

“It is crucial to change the way middle-income countries are treated,” said Sergio Masa, Argentina’s economy minister, at an event in Washington on Friday. “Argentina is [classified as] a middle-income country but two out of three children are in poverty.