Category: Debt

A Soft Law Mechanism for Sovereign Debt Restructuring

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1024px-UN_General_Assembly_hall

By Martin Guzman and Joseph E. Stiglitz

The ultimate goal of sovereign debt restructuring is to restore the sustainability of public debt with high probability[1]. But this is not happening. Since 1970, more than half of the restructuring episodes with private creditors were followed by another restructuring or default within five years[2] 鈥� evidence inconsistent with any sensible definition of 鈥渞estoration of sustainability of public debt with a high probability.鈥� This evidence suggests that relief for distressed debtors is often insufficient for achieving the main goal of a restructuring, delaying the recovery from recessions or depressions, with large negative social consequences.[3]

The lack of a statutory regime for dealing with distressed sovereign debt makes sovereign debt crises resolution a complex process 鈥� marked by inefficiencies and inequities that take multiple forms[4]. The current non-system is characterized by bargaining based on decentralized and non-binding market-based instruments centered on collective action clauses and competing codes of conduct. The IMF often plays the role of the facilitator in this process of bargaining between a distressed debtor and its creditors.[5] But it has not always been successful in ensuring that restructuring needs are addressed in a timely way 鈥� indeed, it has often failed; and as we have already noted, even when restructuring processes have ultimately been carried out, they have often not been deep enough.[6]Read More »

Emerging Market Downgrades: Panic at the Disco?

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When it rains, it pours. For emerging markets, the downpour has come in the form of credit rating downgrades by the big three global ratings companies. Fitch, Moody鈥檚, and S&P took a record聽聽negative rating actions on emerging market sovereign and government-related entities in 2016. Emerging economies are right to be concerned. With a 鈥榞ood鈥� credit rating (AAA), a sovereign state can borrow at very low rates of interest from investors. A poor rating could force states to pay significantly higher borrowing costs. Rating downgrades could have negative ripple effects throughout the affected economies, raising the cost of borrowing for banks and firms, and, in turn, consumers.

Infrastructure projects, business ideas, and consumer credit extensions, become unprofitable due to the higher cost of credit to banks, businesses, consumers, and governments. If a country is downgraded to 鈥榡unk status鈥� (more formally known as 鈥榥on-investment-grade鈥� or 鈥榮peculative-grade鈥�), it risks the mass exodus of investors from its bond markets. As the cost of borrowing for governments increases, this can lead to a dangerous downward spiral as borrowing and spending dries up business and consumer activity declines.

Getting back on course
So what is the best set of policies for emerging markets to recover their credit ratings? On one side are economists who argue for 鈥榓usterity鈥�. In their view, recovering from a ratings downgrade requires sharp reductions in state spending, even if this results in poor conditions in the short term. The benefits are twofold: It can reduce inflation and prices, thereby helping restore a country鈥檚 price competitiveness in international markets; and it can enhance the credibility of a government when it comes to containing profligate spending.

Former British Prime Minister David Cameron called this philosophy 鈥樷��. The problem is that there is not much evidence to聽聽this idea. The EU enforced austerity among its member states in response to the 2007 financial crisis, until it helped propel a 鈥樷�� recession in 2011/12. Following this largely unsuccessful adventure with austerity, the EU turned towards more pro-growth policies, which supported expansions in infrastructure and fixed-capital investment, with notable success.Read More »

The Trouble with Sub-Saharan African Debt

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By Aleksandr V. Gevorkyan and Ingrid Harvold Kvangraven

Over the past decade, the Sub-Saharan African countries鈥� ability to draw on new debt in international capital markets has become a central characteristic of their development experience. Yet, the determinants of their borrowing costs are driven by external factors where investor perception plays a key role. This raises concerns over the sustainability of the current development model.

In the mid-2000s, 30 African countries received substantial debt reduction through the International Monetary Fund (IMF) and World Bank’s Heavily-Indebted Poor Country (HIPC) Initiative. Only a decade later, many of the same countries are again facing debt distress. The its members of the dangers of rising debt obligations, while the IMF has called for an the region鈥檚 growth policies.

In our new paper entitled 鈥淎ssessing Recent Determinants of Borrowing Costs in Sub-Saharan Africa鈥� in the of the we trace the latest round of borrowing back to 2006 with Seychelles as the first sub-Saharan African (SSA) country to issue a sovereign bond, with the exception of South Africa, in 30 years. Since then, DR Congo, Gabon, Ghana, C么te d鈥橧voire, Senegal, Angola, Nigeria, Tanzania, Namibia, Rwanda, Kenya, Ethiopia and Zambia have all followed suit, accumulating over $25 billion worth of bonds, with a principal amount of more than $35 billion (see Figure 1 for totals by country).Read More »