1. What’s the problem?
Emerging-market countries owed more than $8.4 trillion in foreign-currency debt, or about 30% of the developing world’s gross domestic product, as of the end of the first quarter. At least $620 billion may need to be refinanced this year, as many of these nations see the worst effects of the pandemic. The fear is that weaker local currencies, lower government revenues, dwindling foreign reserves and a worldwide recession will make it more difficult to keep up on foreign 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 virus and the lockdowns to contain it have had a major impact on the balance sheets of many others. The number of borrowers in distressed territory has shrunk since the height of a liquidity crisis earlier this year, but as of Oct. 14 at least seven, including Angola, Sri Lanka and Zambia, still had dollar bonds quoted with yields in excess of 10 percentage points more than U.S. Treasuries — a threshold for securities in distress. Zambia skipped an interest payment on its debt in mid-October. 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 a temporary waiver of debt payments by some of the world’s poorest countries, mostly in Africa. The Institute of International Finance, which represents the world’s biggest financial institutions, helped spearhead the voluntary initiative. The Paris Club has recorded at least 30 bilateral agreements through the initiative, and China has pursued its own arrangements with some debtor nations. Meanwhile, the IMF granted debt waivers to at least 29 countries.
4. What can be done?
The initiative backed by the G-20 offers a way for poor nations to pause some of their external debt-service payments through at least the first half of 2021. This so-called standstill gives countries room to spend on health services and measures to prop up their economies without risk of missing a payment. A possible step further would be a program to help some governments restructure their debt loads once there’s enough information to determine how much is sustainable. 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 in default, 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 — from New York hedge funds to Middle Eastern sovereign wealth funds and Asian pension funds — and there are different views on what a relief plan should look like.
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. The fine print in many debt agreements prohibits changes in the terms without the approval of the majority of bondholders.
8. What would private creditors prefer?
Some bondholders say they’d rather deal with requests to change terms or delay payments on a case-by-case basis. Many are hesitant about any plan that paints a group of nations with the same brush. Private creditors representing more than $9 trillion of assets under management formed a group to negotiate debt relief for African nations, warning of the risks of a standstill approach. They say unilaterally halting payments could lock nations out of debt markets, making matters even worse for borrowers.
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