Proposal on Global Debt Management

As the creation of the G20 Leaders’ Summit in 2008 responded to a financial crisis with global impact, so the responses by the G20 to the impact on poor countries of the global COVID pandemic have set in train a reordering of global governance arrangements in the treatment of debt problems, and potentially in development finance more generally.

In 2020, beginning with a temporary debt moratorium, the Debt Service Sustainability Initiative (DSSI), the G20 in conjunction with the Paris Club, established a Common Framework (CF) for Debt Treatments beyond the DSSI. Then in 2022, the Bali G20 Leaders’ Summit agreed to implement a similar approach to the debt problems of vulnerable middle -income countries.

The G20 processes leading up to the New Delhi Summit in September 2023 now have the task of setting out the vision, instruments and the architecture for making these initiatives into a well -functioning new Global Debt Management process embracing both official and private debt and including new creditors with traditional donors.

Progress in developing the debt restructuring and refinancing processes under an expanded Common Framework and applying them to cases has been slow. The challenge for the new Common Framework now is that it should operate across many countries at once and at speed.

Only four countries so far have entered into negotiations with creditor groups under the umbrella of the CF – Chad, Zambia, Ethiopia and Ghana. These processes have taken time to put in place and to generate final packages.

It is in the context of the major move forward in Bali that thinking and discussions are in progress on the implementation of a new Common Framework in the G20 but also in the context of Bretton Woods processes and global finance summits, such as the one proposed by President Macron of France for June 2023 to stimulate more private development finance for the Global South.

At the same time, US Treasury Secretary Yellen is calling for MDB reform, with debt treatment on that agenda. These coming months, ahead of and at the G20 Leaders meeting in New Delhi in September, will be critical, with the role of China in the emerging new architecture and in MDB governance as central. (China, as a G20 member, made the largest contribution to the DSSI, providing 60 per cent of the DSSI relief while holding only 30 percent of DSSI claims of the 47 participating countries).

Secretary Yellen announced in mid-January a planned trip to Beijing in the near future, welcoming a return trip by her Chinese counterparts. Hopefully, this schedule will be maintained, with its opportunities to reach understandings on China’s shared ownership and leadership in a new international debt treatment regime and on collaboration among MDBs in this context, including the AIIB in Beijing and the NDB in Shanghai.

At the Bali G20 Summit, China requested a footnote to paragraph 33 of the Leaders’ Declaration to register its divergent views on debt issues, emphasizing the importance of including debt treatment by multilateral creditors like MDBs. China is maintaining this position, still under discussion in the G20, in current debt negotiations with Sri Lanka. At issue here is the preferred creditor status of the MDBs and their capacity to leverage funding from bond markets around the world. Greater understanding of China’s perspectives on debt practice and the reasons for them need to be considered and balanced by recognition in China of the new context for global finance and its complexity, urgency and constraints.

The World Bank and the IMF had engaged in debt reduction in the context of HIPC and the MDRI, but with special funding to do so from bilateral donors. Their traditional role has been to provide new financing for adjustment programs. From that perspective, participating in debt reduction would test the credit rating of the MDBs at a point when the expanded scope of the Common Framework should be bringing more debt vulnerable countries into active and expeditious negotiations with creditor groups and delivering outcomes which clearly improve sustainable medium term growth prospects.

With these historic shifts underway in global governance of debt and development finance, there is thus a set of fundamental issues to be addressed and integrated into a Common Vision for an Expanded Common Framework, and an architecture for enabling its work at the scale and pace envisaged at Bali. Hopefully, such a common vision will be possible during the first G20 High Level Roundtable on debt to be held on February 17th.

At the core of the debt treatment operations under a new Common Framework will be the relationship between debt reduction “haircuts” and new development financing. Optimal outcomes may well suggest less “haircutting” and more new financing for the investments needed to generate a medium-term sustainable growth prospects that produce medium term financial and environmental sustainability[1]. In other words, a sustainable exit from over-indebtedness comes via shared social and economic progress and spreading well-being, with adjustment processes strengthening the political viability required for these processes to succeed[2].

Ambitious lending programmes would finance ambitious reform programmes. In these times, such growth processes may be more local and more inclusive than in the era of export-led growth, with time horizons stretching over longer periods and with domestic public investments in public goods and infrastructure that support small and medium size enterprises and attract foreign investors and asset managers to be part of such longer-term stories (cf Green, Social, Sustainable and Sustainability-Linked Impacts – GSSSI) [3]. Private creditors could invest in instruments that allowed them to offset participation in “haircuts” via returns available from stronger economic recoveries (as proposed by Lazard Sovereign Debt Advisory Group, see References below).

Debt Sustainability Analysis (DAS), as currently formulated by the IFIs would need to be adapted to such growth patterns, with a shift from macroeconomic targets to the definition, implementation and scaling up of medium-term structural programmes. The G20 Sustainable Finance Roadmap and Sustainable Finance Working Group (SFWG) provide points of concordance and coherence here (3). At the national level, this approach would embody the basic organisational principle for financing the SDGs set out in Paragraph 9 of the Addis Ababa Action Agenda: Cohesive nationally owned sustainable development strategies, supported by integrated national financing frameworks, will be at the heart of our efforts[4].

The new galaxies of creditors and development finance providers require a “large tent “of participants in such debt treatment and finance arrangements, with implicit and explicit geopolitical adjustments in participation and leadership.

It is the new pattern on the creditor side of developing country debt stocks that is compelling the renewal of debt treatment architecture and processes.

In an age when official lending by major Western countries and the traditional International Financial Institutions constituted the bulk of developing country debt stocks, the informal processes of the Paris Club of official creditors, run out of the French Treasury with data supplied by the OECD and World Bank creditor and debtor reporting systems respectively, could work efficiently, essentially via rescheduling with no relief in net present value terms.

Adaptations were required however by major structural evolutions such as the advent of the Eurobond market and syndicated international bank lending in the 1970s, with crises generated by the recycling of oil surpluses and the boom in official export credit lending to developing countries in that decade. Ultimately, a systemic international banking crisis required a new resolution instrument in the form of “Brady Bonds”, guaranteed by the US Treasury, which were available to troubled US banks ready to take a “haircut” on the value of qualifying loan stocks. The Institute of International Finance (IIF)was founded at that time to assist leading US banks to navigate the banking crisis. It is now a global association of the financial industry writ large with some 400 members from 60 countries

The next major debt crisis, in the form of developing country distress in the 1980s following the 1980 “Volcker hike” in interest rates, again ultimately required resolution in the form of the 1996 Highly Indebted Poor Countries Initiative (HIPC) which was enhanced at the 1999 Cologne G8 Summit, and applied to some 39 poor countries, of which 36 countries reached completion point. In 2005 the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative which, with indirect donor support, provided 100 percent relief for HIPC countries on eligible debts to the IMF, World Bank and African Development Fund.

Meanwhile, operating outside the Paris Club, China had been rescheduling maturities of interest free official loans from 1975 and then in 2000 began regularly announcing write offs for HIPCs and low-income countries on these loans and rescheduling maturities on China Export Import Bank loans, with some reductions in interest rates.

As Paris Club members and China now join together under the umbrella of the G20 Common Framework, the suppliers of finance to developing countries have multiplied in form and number. Bond markets now account for 49 percent of total Public and Publicly Guaranteed debt stocks of developing countries, compared with multilaterals at 23 per cent (World Bank only, 11 percent), Paris Club members (bilateral) at 7 per cent and China at 5 percent.

For IDA countries, these numbers are bonds 14 per cent , multilaterals 42 per cent (of which WB 23 per cent), bilateral Paris Club donors 12 per cent and China 18 per cent.

SOURCE: Deborah Brautigam (2023), CWD January 12,2023, revised.

For High Risk and in Debt Distress Countries the numbers are bonds 17 percent, multilaterals 37 percent (of which WB 22 percent ), bilaterals 8 per cent and China 22 percent.

For Sub Saharan Africa, the numbers are: bonds at 31 per cent, multilaterals at 42 per cent (WB 19), Paris Club 6 percent and China 17 per cent. The low shares of Paris Club members reflect the large share of grants in their bilateral development finance. The private international banking industry remains active, accounting for 14 percent of guaranteed debt stocks, including 11 percent of Sub-Saharan African debt stocks. Within the range of actors involved, some current features deserve note: