Key takeaways of our Webinar
Dani Rodrik introduced the panel, stressing the dire situation, with net transfers on debt to low-and-lower-middle-income countries (LMICs) close to zero, lost access to debt markets, and a silent development crisis unfolding. This is happening at a time when challenges are accumulating - from fuel and food prices in the short-term to the necessary green transition in the medium run. The goal of the session is to discuss the innovations that arose in recent debt deals – in Zambia, Sri Lanka, Ghana, Suriname – and to explore what other innovations are needed to improve the development prospects of LMICs.
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- Vera Songwe highlighted that the needs of LMICs extend beyond debt to liquidity. She argued that most LMICs need liquidity now, while only some require debt reduction. The jump in the spread on external bonds, and the loss of market access, are dramatically costly events for frontier economies - they now face big maturity walls, which they will have huge difficulty repaying. The best way to help them is to provide enough liquidity – to prevent further deterioration, which would ultimately lead to a systemic debt crisis. We do not need a new HIPC. What we need, for solvent countries, are solutions such as liquidity backstops, more SDRs, and other instruments that can finance growth opportunities. The DSSI was a timid trial - why not make it a more sustained effort, to the benefit of the countries with good policies that can keep growing and sustaining their debt if they had access to adequate liquidity?
- Chandru Chandrasekhar looked at the recent cases of Ghana and Sri Lanka, where in addition to stabilization programs that include expenditure cuts and tax increases, domestic public debt had to also to be reduced as part of the external debt restructuring exercise. This not only hurt savers and pensioners directly, but also the economy indirectly, through its impact on the banking sector. He argued that requiring cuts in domestic debt to resolve an eternal debt crisis is both regressive and self-defeating. First, fiscal consolidation is being privileged relative to balance of payments consolidation, which remains the key problem that the global safety net is supposed to help resolve. Second, process-wise this involves a non-transparent “double-dose of austerity”: first imposed through the IMF program, and then after negotiations with external creditors. Third, pushing part of the burden onto banks can be self-defeating, because it would necessitate recapitalization of the banks with state funds later.
- Ugo Panizza (DOWNLOAD HIS PRESENTATION) argued that Value Recovery Instruments – or VRIs – used in debt restructuring should in theory generate efficiency gains, relative to a straight payment. By aligning ability and willingness to repay better, VRIs save on default and renegotiation costs. To do so, they should be structured to involve low repayment in the base case, with stepped up-payment in the good cases of nature. But while this can benefit the debtor, it can also be used to extract more rents. Moreover, this instrument may not be valued correctly by the market, leading to concessions that are not compensated fairly. The cases he looked at – Zambia, Suriname, and Argentina - suggest that VRIs have not helped the debtor.
- Ishac Diwan (DOWNLOAD HIS PRESENTATION) argued that with the broadening of the range of creditors of poor countries, a fair comparability of treatment rule should consider that their loans have different levels of concessionality – going from zero to over 50%. If you consider that the grant element is akin an ex-ante debt relief, the haircut on each creditor should be reduced by the grant element of its loans. The flip side of the argument is that creditors lending at high interest rates are already compensated for risk and should agree to take larger losses when risk materializes, and restructurings become necessary. With such a rule, he estimates that the cost of MDBs’ participation in debt restructuring would be small. Such participation can allow MDBs (and IDA in particular) to more forcefully push for debt restructuring when needed, which would end up strengthening their balance sheet.
- In her comments, Hanan Morsy focused on three main issues. First, she argued that the decline in ODA has been the driving force in increasing the vulnerability of LMICs, and their drive to borrow from China and the capital market. The weakness of the Common Framework (CF) is only in part due to geopolitics, the other part is due to dwindling public funds. Allowing MDBs to take losses – in a fair way – would help improve the CF, but donors would need to pay the cost of debt reduction, as during HIPC. Second, not just focusing on haircuts, but instead on reprofiling payments, as suggested by Vera Songwe – and as per President Ruto’s proposal – needs to be explored much more seriously, at least for a set of countries which can be deemed solvent. Related, the availability of resources, at scale and at affordable cost, is key to restart the growth process. This involves scaling up MDB flows, and also issuing/rechanneling more SDR allocation, while reforming the distribution formula. Third, how to share the burden of adjustment domestically is a core issue – in some case, putting some of the burden on domestic debt is unavoidable.
- Martin Guzman explained that restructurings involve two levels of conflict: between the debtor and its creditors, and among creditors. He critically summarized the presentations. In his view, Vera Songwe suggests that more trouble is yet to come, as monetary policy tightens further. Ugo Panizza correctly argued that while good in theory, VRIs get undervalued in practice with respect to what conventional economic theories would predict, which is puzzling, but in his experience, it is the case. Chadru Chandrasekhar is right that by putting more pressure on domestic creditors, the IMF is advantaging external creditors – this also hurts the development of domestic capital markets. Ishac Diwan’s proposal would help improve fairness among creditors, but the question remains as to how to convince non-concessional creditors to accept it.
- One comment from the audience was that all interventions focused on making restructurings more beneficial to the borrowers, but that the IMF was trying to make it more costly, to reduce the incentive to default. But Ugo Panizza countered that this is not the case anymore, and that the IMF has changed.