The Economist - USA (2020-11-21)

62 TheEconomistNovember 21st 2020

1

“T

he procedures for resolving an

international debt crisis”, wrote

Alexis Rieffel, a former American Treasury

official, in 1985, “resemble a three-ring cir-

cus”. In the first ring, the bankrupt country

negotiates with the imf, which must de-

cide how much the country can repay and

what belt-tightening it must endure. In the

second ring, the country asks for leniency

from other governments to whom it owes

money. And in the third, it seeks a “compa-

rable” deal from private lenders.

The circus sometimes, however, strug-

gles to hold it all together. After Argentina

defaulted in May, for example, the imf

failed to play its customary role in the first

ring. It could not provide new supervision

and finance, because the country was still

reeling from the failure of its previous imf

bail-out. The second ring has also suffered

from some absent performers. In the past

decade China has become a far bigger lend-

er to poor countries than other govern-

ments combined (see chart 1). But it is not a

member of the Paris Club, which has tend-

ed to oversee debt renegotiations between

countries and their official creditors. As for

the third ring, when the Latin American

debt crisis struck in the early 1980s, it took

commercial lenders (and their govern-

ments) almost seven years to find a lasting

solution. The juggling went on and on.

Many fear another series of defaults is

looming. Government revenues and export

receipts have plunged in many poor coun-

tries (though efforts by America’s Federal

Reserve to calm financial panic have low-

ered their cost of borrowing). On Novem-

ber 13th Zambia became the sixth country

this year to default on its bonds. Eight

spend over 30% of their fiscal revenues on

interest payments, reckons Fitch, a rating

agency, more than in the early 2000s when

Bono and other debt-relief campaigners

were at their clamorous best. Fitch gives 38

sovereigns a rating of b+or worse, where b

denotes a “material” risk of default (see

chart 2 on next page). According to its pro-

jections, governments with a junk rat-

ing—bb+or worse—may soon outnumber

those classed as investment-grade.

Will the circus handle any new crisis

better than it did in the 1980s? In some ways

its task is even harder now. Poor countries

owe a wider variety of liabilities to a broad-

er range of creditors. For many emerging

economies, bonds have eclipsed bank

loans. And loans themselves are far from

uniform. Some are secured against state

assets, such as a stake in a public enter-

prise, or oil revenues; the creditor might

prefer to seize the collateral rather than

write off the debt. Others are syndicated, or

parcelled out among many banks, which

means that no single creditor can forgive

the loan at its own discretion.

This gnarly mix of instruments is

matched by an equally tangled bunch of

creditors: public, private and everything in

between. In April, for example, the g20

Sovereign debt

Roll up, roll up and write down

HONG KONG

How can governments recover faster from insolvency?

Where it’s due

DSSI-eligible* countries, external-debt stock

of public and publicly guaranteed borrowers†

$bn, by creditor

Source:WorldBank

*DebtServiceSuspensionInitiative

†IncludinguseofIMFcredit

1

500

400

300

200

100

0

191715131109072005

Othercreditors

Othergovernments

China’s government

Finance & economics

63 RCEP,Asia’snewtradedeal

64 A taxscandalinGermany

64 Retailbanks’scrambleforscale

65 Buttonwood:Quantfunds

66 DefaultsinChina’sbondmarket

66 Theslowingvelocityofmoney

67 Greeninvestorssue

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