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Now That Everyone Is on the Standstill Bandwagon ... Where to? Part I

posted by Anna Gelpern

A sovereign debt standstill might not cure COVID-19, but it sure seems like the one thing we can all agree on.

In the run-up to last week's all-virtual IMF-World Bank-G-20 meetings, a chorus of private and public sector, NGO, think tank and academic voices (me included) had called for some version of a pandemic-themed pause on sovereign debt payments. Hardly anyone opposed the idea in public, but relief proposals ran the gamut from ambitious to cosmetic, and it took intense negotiations to get the G-20 to agree on a relatively modest NPV-neutral eight-month respite for the world's poorest countries.  Perhaps most importantly, Saudi Arabia was in the chair and China signed on, signaling that the new(ish) creditor cohort might be taking ownership of the global sovereign debt regime alongside the old bilateral and multilateral creditors. If they follow through, it is a major achievement, and a long overdue first step. The fact that a big financial industry group worked closely with the G-20 and is on board with the outcome is also a good sign. All that's left is ... elaborating the substance and implementing the thing. In this post, I try to sort out what problems a standstill might solve, and how these fit with the G-20 statement. Part II offers three ideas on implementation.

What's the Problem? - Debt, Cash, Data

The World Bank and the IMF had been ringing alarm bells about rising government debt for several years before the pandemic. Their joint report in February warned that even in a favorable macroeconomic environment, debt and debt service burdens were rising in lower income economies, while debt structures (maturity, interest, currency, creditor composition) were getting more and more fragile. But back in February, energy exporters were benefiting from rising oil prices, a growing group of "frontier" markets could still tap international bond investors (if at shrinking maturities), and even some of the poorest had been able to raise badly needed investment funds from new bilateral creditors and domestic savers. As recently as two months ago, criticism of debt fearmongering was commonplace -- after all, lower-income countries needed to raise and smartly allocate trillions of dollars to meet basic needs over the next decade, and borrowing to invest in clean water was a no-brainer in a low-interest environment.  That ... was a million years ago. Now the same countries are facing a world upside down, with frozen markets and trillions of dollars in new COVID-linked financing needs mounting on top of all the existing fragilities.

Against this background, it was notable to see the G-20 statement keyed not to overindebtedness, but rather to national income levels. Only the poorest countries -- those eligible to borrow on deeply subsidized terms from the World Bank's International Development Association (IDA)--can get a standstill if they ask for it. Even though many of these countries are also carrying heavy debt loads, the eligibility criteria and the proposed NPV-neutral terms in the G-20 statement suggest that the dominant objective is not debt or debt service relief, but rapid resource mobilization for the public health emergency. This is a patently worthy goal, with implications for how and where relief is delivered.

In sum, I am inclined to read the G-20 outcome on debt so far as an attempt at quick resource mobilization as distinct from debt or debt service relief, an attempt that brackets most debt-related issues for another day. On the other hand, the choice to deliver resources through the debt channels creates a distinct set of implementation challenges to which I turn in Part II. 

*Updated to reflect the Development Committee communique.

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