The EconomistOctober 17th 2020 Finance & economics 611G
overnments in manypoor countries
have faced a sickening choice this year,
between spending to support their popula-
tions through the covid-19 crisis and pay-
ing creditors. On October 14th finance min-
isters of the g20 group of countries offered
a temporary salve for 73 of the world’s need-
iest countries, by saying they would extend
their Debt Service Suspension Initiative
(dssi) to halt debt-service payments until
July 2021. That should free up funds to fight
the pandemic (see chart). But a lasting sol-
ution will take more dramatic action.
Public debt in poor countries rose from
29% of gdpin 2012 to 43% in 2019, accord-
ing to the imf, and is expected to jump to
49% this year. Collapsing tax revenues and
swollen deficits make it harder to pay the
bills and give foreign investors the jitters.
According to data from the World Bank and
the three largest credit-rating agencies, at
least 33 of the dssi-eligible countries were
either close to or in debt distress—ie, strug-
gling to meet their repayment obligations.
The 73 countries eligible for thedssiwere
due to spend over $31bn servicing debt be-
tween May and December. About half of
this was owed by the 33 countries under
most fiscal strain, which include Ethiopia,
Mozambique and Zambia.
If a wave of sovereign defaults has been
avoided, it is because central banks have
lowered interest rates and international fi-
nancial institutions have doled out emer-
gency funds. But neither these nor the
dssi, which only suspends debt-service
payments, can fix longer-term solvency
problems. Where these exist the best sol-
ution is probably a quick debt restructur-
ing in order to avoid disorderly defaults.
The underwhelming experience of the dssi
helps illustrate why speedy restructuring
could be devilishly difficult to achieve. So
far only around $5bn of debt-service pay-
ments between May and December this
year have been suspended.
One difficulty was that struggling bor-
rowers were wary of signing up, in case
they worsened their financial position.
The g20 encouraged private creditors,
which were owed another $5bn between
May and December, to participate, but
found that poor countries worried that rat-
ing downgrades might ensue. Some fretted
that approaching even official creditors
would be taken badly by rating agencies.
“We would certainly ask why they needed
to avail themselves of that option,” saysTony Stringer of Fitch, a rating agency.
Then there was the matter of getting
other lenders on board. The “Paris Club” of
mostly rich-country governments was
once important enough to call the shots in
any restructuring. But by the end of 2019,
the strained 33 owed around a quarter of
their public debt to China, which is not in
the club. And although China signed up to
the dssion paper, and has been one of the
biggest providers of relief, in practice it has
wriggled out of offering the same terms as
other countries. Quibbles have included
whether the payments should be halted
from the date at which the request for sus-
pension was made or when its terms were
finalised, and whether countries already in
arrears should get relief. China also insist-
ed that the China Development Bank,
which makes development loans, was not
an official lender, and should therefore be
excluded from the scheme.
Definitions of private and official credi-
tors are “manipulable, manipulated, and
totally beside the point”, says Anna Gelpern
of Georgetown University. What matters is
that creditors are treated equally, so that
they can agree on restructuring quickly
without suspecting that their own sacrifice
may be lining other creditors’ pockets. If
the process is slowed down by Chinese
lending agencies squeezing the most from
their debtors, then the indebted country
could end up with too little relief, and de-
fault later anyway.
The extension to thedssimight suggest
that lenders are trying to put off difficult
questions around restructuring. Encourag-
ingly, though, the g20 also said that it had
agreed in principle on a “common frame-
work” for debt restructuring, which could
ensure that g20 creditors and the private
sector are treated alike. The details are yet
to be hammered out before a summit in
November. But if it prods the Chinese au-
thorities to co-ordinate across their va-
rious lending agencies, it could lead to
some real relief. 7WASHINGTON, DC
Why securing debt forgiveness for poor
countries is so hardGovernment debtRelief efforts
In need of a reprieve
Total debt-service payments due
Selectedcountries,January-June2021,$bnSources: World Bank; Moody ’s*WorldBankratingwhereavailable;Moody ’swherenot
†Includesbondholders,non-officialandmultilaterallendersSenegalMyanmarCameroonCongoZambiaIvory CoastMozambiqueEthiopiaAngolaPakistan543210Othercreditors†Bilateral lendersIn or at high risk of debt distress*I
n the 1980 scomedy, “Trading Places”, Ja-
mie Lee Curtis plays a prostitute who has
been saving for her future; she has $42,000
“in t-bills, earning interest”. If she fol-
lowed the same strategy today, she would
be disappointed with the return. The one-
year Treasury bill yields 0.13%, so her annu-
al interest income would be just $55. If she
reinvested the income, it would take more
than 530 years for her money to double.
Savers around the world face the same
problem. Bank accounts, money-market
mutual funds and other short-term instru-
ments used to offer a decent return. Not
any more (see chart on next page). Rates are
lower in nominal terms than they were 30
years ago because of a long-term decline in
inflation, but they are also lower in real
terms. The pandemic has made the dilem-
ma acute. This year American, British and
German nominal ten-year bond yields have
all touched their lowest levels in history.
Savers are likely to respond to this situa-
tion in one of three ways. They can save
less, and spend more of their incomes. An-
other approach is to set aside more money,
to make up for lower returns. A third op-
tion would be to put more savings into
risky assets, such as equities, which should
deliver a higher return over the long run.
So what will savers actually do? Unfor-In a world of low interest rates, savers
have few good optionsPersonal financeThe saver’s
dilemma
Short-changed