Is the world ready for sovereign debt restructurings?

As the IMF Managing Director Kristalina Georgieva and other prominent economists underline, the low-income countries’ debt burden has become heavier during the Covid-19 pandemic. It is very true that the prevention of the development gains made over decades depends on access to more grants, concessional credit, debt relief and debt restructurings.

However, with more countries gaining market access (especially low income and frontier economies), financing challenges are shifting. Gaining market access is perceived as a good thing as these countries were graduating from concessional financing. Yet, substituting market-based financing for concessional finance presents new challenges and risks for those countries.

Since the beginning of the century, there has been an significant change in the range of countries providing official finance to other sovereigns. Creditors such as China, India and some energy exporter countries emerged as important lenders. Even in some parts of the world (notably in Africa), these non-Paris Club member countries provided the bulk of new official financing over the last decade. Unless the non-Paris Club creditors agree to restructure their credits within the Paris Club on an ad hoc basis, the sovereign borrower will need to negotiate bilaterally with each lending country. Such uncoordinated process for restructuring bilateral debt would be costly and might leave deep scars on the economy.

Up to now, Paris Club principles worked rather well in a context where the Paris Club creditors accounted for the majority of official financing. However, this is not the case anymore. Thus, concerted efforts needed on a global scale in order to avoid painful restructurings. As IMF had a key role in many restructurings in the past, the fund could take the lead in orchestrating the efforts. It is a good time to introduce a comprehensive and sustainable solution which might place the IMF between the sovereign and the bilateral lenders. This might not be fully compatible with the principles of free market economy but deemed to be necessary if the global society would like to keep hard earned gains on the way to development goals.