The EconomistNovember 21st 2020 Finance & economics 632 group of big economies called on member
governments to provide a repayment holi-
day on loans to the world’s poorest coun-
tries. China was unhappy that private cred-
itors did not share in the effort. Others
complained that China Development Bank,
which is owned and directed by the state
but not synonymous with China’s govern-
ment, did not take part.
There has, however, also been progress.
On November 21st-22nd, g20leaders will
sign off on a “common framework” for re-
negotiating debts with the world’s poorest
countries. The framework, in effect, ex-
tends the principles of the Paris Club to
those g20members who are not already in
it, widening the second ring of the circus. It
applies only to countries with unsustain-
able debts, and any borrower that receives
relief from the g20must seek a similar deal
from other creditors. Because all lenders
must do their bit, little hangs on whether
they are classified as official or private.
That is perhaps why the framework has
met little opposition from China.
There has been progress in contracts as
well as clubs. After Argentina defaulted in
2001, it offered to exchange its unpayable
bonds for new securities with easier terms.
Some bondholders rejected the deal, seek-
ing full payment in New York’s courts in-
stead. That made life harder for both Ar-
gentina and its other creditors. Since 2003,
most bonds issued under New York law
have contained “collective-action clauses”,
which compel all bondholders to go along
with any deal accepted by the majority.
Such clauses helped Ecuador resolve its de-
fault this year with “hardly any real grum-
bling”, notes Clay Lowery of the Institute of
International Finance, a bankers’ associa-
tion. They also helped Argentina reach a
deal with its main bondholders in August
(albeit with “a fair amount of grumbling”).
A review of the “architecture” for resolv-
ing sovereign debt, published by the imf in
September, pondered other contractual in-
novations that might ease future restruc-
turings. Lenders might insist on wider use
of “negative-pledge clauses” that prevent a
borrowerpawningvitalassetsascollateral
toothercreditors.Syndicatedloansmight
add“yankthebank”provisionsthatallowa
lendertobekickedoutofthesyndicateif it
blocksa deal.Thefundisalsopayingre-
newedattentionto“contingent”debtin-
strumentsthataremoresensitivetothe
upsanddownsthatbefallpoorcountries.
Barbados,forexample,hasissuedbonds
thatrepaylessintheeventof anearth-
quakeortropicalcyclone.
Oneidea,proposedbyBenHellerand
PijusVirketisofhbkCapitalManagement,
aninvestmentfund,is“bendybonds”.In
mostcases,thesewouldbehavelikeordin-
arybonds.Butina crisistheissuercould
extendthematurityanddeferinterestfora
coupleofyearsinreturnforpayingaddi-
tionalinterestattheendofthebond’slife.
Theissuercouldbenefitfromthekindof
paymentholidayenvisaged intheg20’s
Aprilinitiativewithoutanyhelpfromthe
greatpowers.Asthelonghistoryofdebtre-
structuringsattests,“fixed”incomeliabil-
itiesareoftenanythingbut.Solemncom-
mitmentstopayinfullandontimecannot
always be kept. Lenders and borrowers
alike might therefore welcome instru-
mentsthatspecifyupfrontwhenandhow
fixedincomewillbecomemoreflexible. 7Grade deflation
World,sovereigncreditratings,%oftotalSource:FitchRatings2B/C/DBBBBBAAAAAA0 10 20 30 40October 2010 October 2020Speculative gradeInvestment gradeI
t took eightyears of gruelling negotia-
tions to agree on the Regional Compre-
hensive Economic Partnership (rcep),
which was signed by 15 countries in Asia
and the Pacific on November 15th. The
world’s newest and biggest regional trade
deal is not the deepest. It eliminates fewer
tariffs than normal, and some only after
two decades. Its coverage of services is
patchy, as is that of agricultural goods. In-
dia is not a member. Still, when leaders met
virtually to sign on the dotted line, they
hailed the pact as a triumph.
rcep began as a tidying-up exercise,
joining together in one overarching com-
pact the various trade agreements in place
between the Association of South-East
Asian Nations (asean) and Australia, Chi-
na, Japan, New Zealand and South Korea.
That limits how much trade will be newly
affected. Of the $2.3trn in goods flowing
between signatories in 2019, 83% passed
between those that already had a trade deal.
Some trade will be newly affected,
though. China had no existing deal with Ja-
pan, for instance; nor did South Korea. Sorcep’s economic impact will be more than
a rounding error. Peter Petri of the Peterson
Institute for International Economics, a
think-tank in Washington, and Michael
Plummer of Johns Hopkins University esti-
mate that Japan and South Korea will gain
the most. By 2030 their real incomes are ex-
pected to be 1% higher than they would
have otherwise been.
Perhaps the biggest benefits will come
from rcep’s rules of origin, which set out
how much regional content a product must
have for it to enjoy lower tariffs. aseanhas
trade deals in place with China, South Ko-
rea and Japan, but a coffee cup exported by
a member may face three different sets of
rules depending on the destination.rcep
helps by offering companies one set of
rules (and paperwork). Rules on content
are relatively liberal: many products will
need just 40% of their value to be added
within the region in order to take advan-
tage of lower tariffs.
The fastest way to annoy Asian dip-
lomats would be to claim that the pact is
“China-led”—in fact, asean started the
talks. Still, the deal serves China’s inter-
ests. It had once warily watched its neigh-
bours sign up to the Trans-Pacific Partner-
ship, which reined in state-owned firms
and included rules on labour and environ-
mental standards. Now rcep could
strengthen China-centric supply chains—
with none of those constraints.
Members may hope that rcepensures
the resilience of supply chains by support-
ing new, competitive production bases that
can withstand the sudden imposition of
trade restrictions. The region’s vulnerabili-
ty to such actions became clear this year,
when many in the g20group of countries
applied restrictions during the pandemic.
These tended to hurt aseanmembers most
often, according to analysis by Global Trade
Alert, a monitoring group.
Curmudgeons complain that rcepwill
promote regional trade and supply chains
at the expense of those that involve non-
members, however. Stronger rules cover-
ing competition, state-owned firms or pro-
duct standards might have allayed those
fears. But it seems that agreeing on those
was too difficult, partly because rcep’s
members are at vastly different levels of
economic development.
For any of these predictions to come
true, signatories must first ratify the agree-
ment. Deborah Elms of the Asian Trade
Centre, an advisory firm, reckons that
could happen by January 2022. Some hope
India will join after that, but the chances
seem slim. (It withdrew from negotiations
because of worries its industry would be
swamped by imports from China.) Others
hope rcep will revive American interest in
the region. Domestic politics will make
bold trade initiatives hard for a Biden ad-
ministration. But it will be watching. 7The winners from Asia’s new trade pactRCEPBig deal