Solvency concerns in the developing world are nothing new. But as governments stare down the humanitarian and economic shocks of the coronavirus pandemic, some emerging markets with weak financial positions are at greater risk of defaulting on their debts. At least 102 nations have already asked the International Monetary Fund for help, and the Institute of International Finance is coordinating an effort to offer some relief to the poorest countries. Complicating matters, meaningful relief would need the backing of creditors ranging from multilateral organizations to bilateral lenders and private creditors.
1. What’s the problem?
Emerging markets owe more than $8.4 trillion in foreign-currency debt, or about 30% of the developing world’s gross domestic product. At least $730 billion is coming due through the rest of this year, as many of these nations see the worst of the virus, which will severely tax health systems. The fear is that weakening local currencies, dwindling foreign reserves and slower global growth, compounded by lower oil prices, will make it harder for some developing countries to keep up on their external debt payments.
2. Which countries are in trouble?
While some nations — Argentina, Lebanon and Venezuela among them — were in trouble long before Covid-19 scared investors out of risky assets, the pandemic has helped at least 15 others to linger in distressed territory. Ecuador has already won temporary relief from its bondholders, but Zambia, Suriname and Angola are among those with dollar-bond yields in excess of 1,000 basis points over U.S. Treasuries — a threshold for securities to be considered in distress. Lower-income countries and those reliant on tourism and remittances are also in need.
3. Who is trying to help?
Leaders of the Group of 20 developed nations backed temporarily waiving debt payments by some of the world’s poorest countries, mostly in Africa. The IIF, which represents the world’s biggest banks and financial institutions, is helping spearhead the voluntary initiative. This plan will likely appeal most to countries indebted to bilateral lenders, such as Cambodia and Myanmar, and is designed to free up funds to combat the crisis. Still, only about 73 countries will be eligible to request access to the program. Meanwhile, the IMF has granted debt waivers to at least 25 countries.
4. What can be done?
One obvious option is a so-called standstill — forbearance on external debt-service payments through at least the end of this year. This would give countries room to spend on health services and measures to prop up their economies without risk of missing a coupon payment. A possible step further would be a program to help some governments restructure their debt loads once there’s enough information to run sustainability analysis. One inspiration for that idea is the Brady Plan of the late 1980s.
5. What did the Brady Plan do?
Announced in 1989, when countries in Latin America, Eastern Europe and Africa were struggling to pay off loans, the U.S.-led initiative restructured the debt of 18 developing countries into more than $160 billion of so-called Brady bonds, many of which were backed by zero-coupon U.S. Treasury bonds or funds from the IMF or World Bank. The bonds and plan were named for Nicholas Brady, treasury secretary under U.S. Presidents Ronald Reagan and George H. W. Bush.
6. Would another Brady Plan work now?
Not without substantial changes. The key difference is that the Brady Plan mainly transformed commercial bank loans, many of which were already defaulted, into collateralized bonds. It was a way to relieve pressure on Wall Street and encourage growth in the developing world. Today, emerging markets owe money to a wide range of creditors, and a relief plan would need the backing of hundreds of creditors from New York hedge funds to Middle Eastern sovereign wealth funds and Asian pension funds.
7. Will private creditors get on board?
It’s no easy task to persuade private investors, especially those with large emerging-market exposure, to take a hit by deferring debt payments. It’s also unclear whether their fiduciary duties to clients would allow investors to grant leniency, even if they wanted to. Fine print in many deals also make it so that terms cannot be legally changed without the approval of the majority of bondholders.
— Bloomberg