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

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.

• Governments in the poorest countries owe debt overwhelmingly to other governments and multilateral institutions: $104.4 billion as of 2018, compared to $13.7 owed to private creditors, mostly in the form of loans ($11.1 billion). Bonds accounted for just $2.6 billion, though the stock had risen some since then. From a resource mobilization perspective, this is good news: bilateral creditors have already committed to a standstill, and multilaterals are working on ways to get there. On the other hand, government creditors would face massive political backlash if their largesse were used to pay off private creditors--yet they have limited means to force private creditors to go along. Would governments credibly deny emergency funds to poor countries when a stray bondholder refuses to give up an interest coupon?
• If the primary goal is a quick cash infusion for public health, as distinct from public debt sustainability, it would be essential to show that (admittedly fungible) cash was in fact used to fight the pandemic. I imagine that any funds freed up from bilateral and multilateral forbearance would be monitored as part of a broader multilateral policy scheme, with an eye to government capacity building in the borrowing countries. But what about the relatively small amounts owed to private creditors through the end of 2020?  Setting up a separate monitoring apparatus for these seems wasteful and potentially counterproductive as a policy matter. 
• The focus on national income leaves lots of problem debt outside the frame. Some middle-income countries like Argentina, Ecuador, Lebanon, and Venezuela, were in deep debt trouble before COVID-19, and many more are likely to get there before long. Middle-income countries, unlike the poorest, owe more to private creditors, especially bondholders, than they owe to other governments and multilaterals. The G-20 statement does not cover their debt. Ineligible countries in Africa include Algeria, Egypt, Libya, Morocco,  South Africa, and Tunisia, some of which are suffering badly from the pandemic. Over the weekend, the Development Committee communique included a line suggesting there might be more action on middle-income countries' debt problems "on a case-by-case basis" -- a placeholder for uncertain times. 
  • Emerging market governments with fresh memories of market access could well prefer to lay low for now. They might not ask for a standstill even if they are strapped for cash, on the theory that investors would reward repayment fortitude in the face of a public health catastrophe. Assuming this is true (and I doubt it), as my colleagues and I have argued elsewhere, there is no earthly reason wny such countries should not be eligible for a standstill if they need financing from the IMF and/or the multilateral banks, and if their debt sustainability is in doubt. An NPV-neutral pause is a genteel way to insure against subsidizing capital flight and a deeper debt crisis in the face of pandemic-related uncertainty. Very broad-based eligibility would minimize residual stigma.
• Uncertainty is a problem across the board, but it presents differently in countries whose debt is patently unsustainable, including those already mentioned. When a government needs to restructure with or without an IMF program, a standstill can create space for the sovereign and its creditors to collect information about the prospective recovery path, which is anyone's guess these days. If the IMF cannot see much past the fog in its flagship economic report, any projections for countries whose economic performance varies wildly with global conditions are simply promises to reconvene and revisit.
  • Value recovery instruments have been used to bridge this kind of an uncertainty gap; however, they have had a lousy track record when it comes to valuation, while a relatively brief standstill could see some COVID fog clearing out.

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.