Sovereign debt restructuring and the G20 Common Framework: real or symbolic progress?

That the international architecture for the management of sovereign debt crises is deeply dysfunctional is uncontested. The ineffectiveness of the current patchwork of institutions and separate but interconnected debt restructuring processes (Gelpern 2016) is all the more concerning given the present situation of widespread distress in low-income and emerging economies (International Monetary Fund 2023, Volz et al. 2022).

The latest multilateral initiative for the resolution of debt distress in low-income countries (LICs) – the Common Framework for Debt Treatment Beyond DSSI – was initially heralded as a great success. Jointly developed in the wake of the COVID 19 pandemic by the G20 and the Paris Club, it aims to provide a lasting solution to debt sustainability issues. It grew out of the dissatisfaction with the previous Debt Service Suspension Initiative (DSSI), which only envisaged a temporary standstill on official bilateral and multilateral payments. Commercial creditors, who could adhere on a voluntary basis, did not participate.

It was clear from the start that the Common Framework would share a fundamental limitation with the DSSI, namely the fact that eligibility is confined to LICs. Apart from this structural constraint, several elements gave the Common Framework the appearance of a significant step forward. First, it expressly acknowledged the possibility of outright principal reductions. Second, it was the first initiative bringing together traditional creditor countries represented in the Paris Club and emerging bilateral lenders such as India, Brazil and, most notably, China (Viterbo, 2020). Third, it explicitly mandated comparability of treatment for commercial creditors (Rivetti 2022, Hinz 2022).

Now that some time has passed since the initial launch, and considering recent developments in Zambia and Ghana, the time has come to take stock. The experience of recent years has shown that, despite its symbolic value, the Common Framework constitutes a partial success at best. To begin with, very few countries have applied, partly due to fear of their credit ratings being downgraded. So far, just four countries have applied: Chad, Ethiopia, Zambia and, more recently, Ghana. Furthermore, negotiations have been drawn out and contentious, frequently hampered by geo-political tensions and by conflicts among commercial and official creditors. Of the four countries that have applied, only Chad and Zambia have obtained debt treatment.

Three sticking points have emerged in particular. First, while an International Monetary Fund (IMF) financial assistance programme is required as a condition for Common Framework debt treatments, approval of financial assistance programmes by the IMF Board is dependent on the provision of financing assurances in principle by bilateral creditors. This has caused considerable delays. This hurdle could be addressed with a more active role of the Fund in securing financing assurances from official creditors. After all, the same official creditors are also the Fund’s shareholders (Hinz 2023). The second bone of contention, unsurprisingly, has been the requirement for comparability between official and private sector debt treatments, as was testified by the vicissitudes in the negotiations for Zambia. Finally, the third issue concerns controversies surrounding the IMF’s debt sustainability analysis (DSA), as was demonstrated by the recent setback in Ghana’s commercial debt restructuring.

At the end of March, Zambia was finally able to resolve a default lasting since November 2020 by reaching an agreement with commercial creditors on $4bn of bonds. The path to this resolution, however, was all but easy. Already in December 2021 Zambia reached a staff level agreement with the IMF on a three-year $1.3bn programme. However, due to delays in the formation of the official creditor committee, and therefore to the absence of financing assurances, the programme could not be approved until summer 2022. It then took another nine months, until April 2023, for bilateral creditors to agree on a debt treatment. One of the main obstacles was China’s opposition to the exclusion of multilateral development banks (MDBs) from the restructuring. This was overcome thanks to the MDBs agreeing to provide additional financing to support the recovery of Zambia. The agreement was somewhat innovative as it foresaw the possibility of a subsequent adjustment in the case of enhancement of Zambia’s debt carrying capacity. Negotiations with commercial creditors on restructuring $4bn of bonds went on in parallel. In November 2023, a first deal failed due to the official creditors contending that it would violate the comparability of treatment requirement. The rejection of the deal was heavily contested by bondholders. Notably, commercial creditors have no voice in the negotiation of official debt treatments. Finally, a new deal was reached at the end of March. In financial terms, the new agreement provides for additional net present-value reduction, but the difference is not extreme. Curiously, however, various non-financial provisions have been added, including a ‘most-favoured creditor clause’ requiring Zambia to ensure that other creditors would not receive better treatment. This provision was arguably intended to ensure equal treatment of other non-bond commercial creditors, especially state banks, which China chose to classify as commercial, and possibly the African export-import bank.

By contrast, no definitive resolution of Ghana’s debt crisis has yet been reached. Ghana defaulted in December 2022. An IMF staff-level agreement on a $3bn extended credit facility was reached the same month, but once again approval of the programme was delayed until May 2023 due to absence of financing assurances. In January 2024, an agreement on official debt treatment was concluded. However, restructuring talks with commercial creditors derailed last April after a first deal with bondholders holding $13bn of external bonds was rejected by the IMF. According to the Fund, the proposed deal would have breached the parameters of the DSA. At the end of June a new agreement was reached, but assessment of whether it meets the comparability of treatment requirement is still pending. It should also be pointed out that a significant component of Ghana’s debt stock consisted of local currency securities governed by domestic law, which were mostly held in the country’s banking system. Ghana autonomously restructured the domestic debt with the help of regulatory coercion (Hinz 2023). The repercussions on the domestic banking system have been so significant that the World Bank is currently expected to support the Ghana Financial Stability Fund with $250ml.

To conclude, it appears that while the Common Framework might help foster much-needed dialogue among (especially official) creditors and support the development of a shared sovereign debt crisis governance culture, for the moment it is certainly not a game changer. Whether the Global Sovereign Debt Roundtable recently set up by the IMF to address the shortcomings of the Common Framework will lead to tangible results remains to be seen.

References

Gelpern, Anna, ‘Sovereign Debt: Now What?’ (2016). Georgetown Law Faculty Publications and Other Works. 1832.

Hinz, Livia, ‘Private Sector Involvement in Sovereign Debt Governance in the Post-Pandemic World: The Role of the “Comparability of Treatment” Principle’ (2022). European Journal of Legal Studies. 25.

Hinz, Livia, ‘Emerging markets in debt distress: exploring options for debt restructuring’ (2023). Wilton Park Report, available at https://www.wiltonpark.org.uk/reports/emerging-markets-in-debt-distress-exploring-options-for-debt-restructuring/.

International Monetary Fund, Annual Report 2023, available at https://www.imf.org/external/pubs/ft/ar/2023/english/.

Rivetti, Diego, “Achieving Comparability of Treatment under the G20’s Common Framework” (2022) World Bank Report 168876.

Viterbo, Annamaria, “The Role of the Paris and London Clubs: Is It under Threat?” in The Legal Implications of Global Financial Crises / Les implications juridiques des crises financières de caractère Mondial (2020) Brill – Nijhoff.

Volz, Ulrich, Berensmann, Kathrin, Burke, Sara, Gallagher, Kevin P., Griffith-Jones, Stephany, Kessler, Martin and Monasterolo, Irene ‘Addressing the Debt Crisis in the Global South: Debt Relief for Sustainable Recoveries.’ (2022). T7 Sustainable Economic Recovery Task-Force Policy Brief, available at https://think7.org/addressing-the-debt-crisis-in-the-global-south-debt-relief-for-sustainable-recoveries/.