Averting Catastrophic Debt Crises in Developing Countries Extraordinary Challenges Call for Extraordinary Measures

July 2020

Averting Catastrophic Debt Crises in Developing Countries Extraordinary challenges call for extraordinary measures

Joseph Stiglitz and Hamid Rashid*

Columbia University

I. Introduction

The world is facing two highly correlated risks of a devastating pandemic and a rapidly unfolding economic crisis. Fighting the pandemic required governments around the world to impose lockdowns and restrict economic activities for several months, which made an economic crisis all but inevitable. Developed economies – rolling out large stimulus measures – will likely survive the economic tsunami, though even they will be hard hit. The fate of developing economies is less certain. A third risk – an impending debt crisis – hangs like a Damocles’ Sword over the developing countries.1

Notwithstanding the magnitude of the economic and health challenges, developing countries can still avoid a crippling debt crisis with extraordinary measures. The consequences of a debt crisis at any time are devastating. Latin America’s lost decade is generally attributed to that region’s debt crisis; the Greek debt crisis – plunging the country into a half-decade long recession – is yet another example. But as part of, and in the aftermath of, the pandemic the effects could be far worse, especially for the afflicted countries that are home to %70 of the world’s poor. Many of them are fragile economies. A balance of payments problem – say, from a decrease in export earnings precipitated by Covid-19 – will easily catapult them into a debt crisis. A full-blown debt crisis will inevitably force painful cuts in government spending, including on health, education and other social sectors. Such spending cuts will lead to years of low growth and high unemployment.

The United Nations has described vividly the magnitude of the problem. More than half of countries worldwide – and two-thirds of the world’s population – will suffer the consequences of inaction. Stagnation and high unemployment in developing countries will push 140 million more into extreme poverty, breeding discontent and instability and wiping out years of development. Their recovery from what the United

* The views expressed here do not reflect the views of the United Nations or its member states

1 Many of them are also facing yet another risk. The United Nations Secretary General recently warned against the worst

CEPR POLICY INSIGHT No. INSIGHT POLICY 104CEPR food crisis in 50 years (Guardian, 2020). CEPR POLICY INSIGHT No. 104 July 2020 02 countries, with ethnic and other fractures, civil strife. civil fractures, other and ethnic with countries, some in and unrest, be will there obvious: are consequences political The potential years. take will slowdown Nations 2 peacekeeping and peacebuilding operations in the near term. term. near the in operations peacebuilding and peacekeeping assistance, humanitarian in of dollars world save the billions will economies these in debt crisis prevent acascading to measures Pre-emptive out of stone. water squeezing to tantamount is year this payments debt $130 service in billion make to countries Forcing developing areality. become will future adystopian developing countries, of debt the burden unsustainable the address we Unless action. collective global But forge must we debt crisis. out current us of the get to for no awar need is There world of recovery. path on the theto put war another devastating took It lingered. Depression theGreat of sufferings al, et 1990) (Eichengreen failed the London and conference table.The the off issue the keeping in prevailed but States United for the debt relief, –urged time atthat country indebted heavily most – the The Kingdom United recovery. to path the 1933 discuss to London in in met 70 governments nearly Depression, Great the economy plunged into world the end and Twenties an to Roaring came the As States. United the debt to own their pay down to debt payment German the used then countries debtor These others. and Netherlands the Belgium, France, Kingdom, United the debt to war its repay it could that so Germany to of – supplied credit huge time sums the at creditor largest the – States theRoaring The Twenties. United during emerged system financial global – – profitable perilous but Ahighly debt. war unsustainable with saddled –were lost who those and who war won the those –both countries European world wars, two the Between prescient. were warnings His Versailles. in on Germany imposed powers victorious the that debt burden unsustainable of the risk the world the against warned Keynes John Maynard pandemic, global another during ago, years hundred One bomb. atime like tick to continues debt crisis of acalamitous The likelihood required. be will of debt that restructuring the with it didn’t deal and markets, of emerging debts the with it didn’t deal debt, private with it didn’t deal abeginning; but just beginning, on official The stay progress. (G20, countries 2020). little for is low- there middle-income and But calls, the beyond (United Nations, 2020).(United Nations, The G20 debt distress in low-income other and countries countries developed for least the debt relief for immediate called urgency. The the has Nations United and gravity the recognised has community The international catastrophe. prevent the to for failing the of blame part get will the of theWest anddemocracies structure financial global the an avoidable of consequences the suffering millions with indubitably tarnished, be will system multilateral of the The credibility reality. new the become could of crises cycle Aperpetual crisis. climate the away from attention divert will crisis migration Acostly America. North and Europe en masse countries leave their to begin will – jobs find to –desperate Asia South and America Central and South Africa, in Millions economies. developed the not spare will consequences economic dire These countries. across and within spread will conflicts and instability unrest, Discontent, borders. out across spills often unrest Political consequences. global There is a long list ofsuchcountries,including Cote d’Ivoire,There isalonglist Kenya, Uganda andSriLanka. (UNDESA, 2020) IMF the (UNDESA, and debt for the poorest countries that they called for was a for was called they that countries debt for poorest the and overwhelm the border walls of the rich countries countries rich of the walls border the overwhelm and has rightly called for a moratorium on debt servicing on debt servicing for amoratorium called rightly has (2020) predict will be an unprecedented global global (2020) unprecedented an be will predict debt crisis. Almost surely, and deservedly, surely, deservedly, and Almost debt crisis. 2 But these problems will have problems will But these CEPR POLICY INSIGHT No. 104 July 2020 03 the debt. the service to need they currency hard the generate to remittances and earnings export to prevent future debt crises. prevent future to taken be might that some measures discuss we section, fourth the In – bond buybacks. attention sufficient not received has that We one particular in suggest restructurings. debt and standstills comprehensive enforcing and encouraging including burdens, reducedebt to proposals alternative consider anumber we of third, the In suffice. not will debt standstills, entailing mostly proposals, why current and needed are actions why urgent explain we second, the In pandemic. of the shock the to vulnerable so are they which in position aprecarious such to markets emerging and countries developing many so led that some factors of the debt problem, identifying current the of thenature we describe first, the In sections. four includes Policy Insight This problem. immediate comprehensive solution the to a We find now to not wait. act must –will fallout devastating its –and The debt crisis a system. such put place in to not years, if months, take But it will survives. strongest the where jungle of the rule prevent the debt and of sovereign orderly restructuring ensure will debt workout sovereign mechanism equitable and fair A rules-based, 2015. in adopted 136 countries that resolution Assembly General UN the in envisaged as workout mechanism, debt restructuring sovereign the jump start to It time is a debt crisis. from gain to stand and orderly and debt restructuring block timely to advantageous it find who often creditors, private to owed debts of sovereign cost high on the focus we Policy Insight, this In of developing debt burdens countries. excessive problem of systemic the address to opportunity aunique presents crisis The current the G20. the not of members are that countries debt of 111 low- middle-income and external the doubling of 2009 in –saw amore than Recession Great the –since decade The past SITUATION CURRENT THE OF AN ASSESSMENT The gatheringstorms of adebt crisis II. 5 3 4 countries is denominated in dollars or other hard currencies. or hard other dollars in denominated is countries developing other of the borrowing of the all almost currency, local in denominated debt international issue to managed economies emerging large afew While 8% GDP of their 2020. in reach to expected is countries debt of these external sector of public private and 2018. in billion Servicing 2008 $880 $520 in to billion from – increased creditors foreign from banks and corporations by private (PNG) borrowing is, debt –that non-guaranteed Total private 30% by only 1990-2008. during increased 2018 in ( 2008 $1.3 in to trillion billion $600 from (PPG) debt –increased or sovereign public publicly guaranteed and as to referred –generally countries these in debt of governments external The total exports.

outstanding, byresidenceoutstanding, andnationality ofissuer”). (Source: Bank forInternational issuesandamounts currency Q1 2020wasindomestic “Debtsecurities Settlements, Only 5.5%ofthedebt59low-and middle-income countriestha T of theUnited (Stiglitz,2010). Nations Assembly General onReforms oftheInternationalthe CommissionofExperts Monetary andFinancial appointedbythePresident System resolution (seehttps://digitallibrary.un.org/record/820120?ln=en UNresolution of ). The wasafollow-uptothe Report Only sixcountries–Canada,G his also obviously also excludes those countries with no data on external debt thosecountrieswithnodatahis alsoobviouslyexcludes onexternal 4 Nearly two-third of these countries are highly dependent on commodities dependent on commodities highly are countries of these two-third Nearly ermany, Israel, Japan, United Kingdom andtheUnited the states –votedagainst Figure 1 Figure ). For context, their total PPG debt total their ). For context, t had outstanding internationalt hadoutstanding bondsasof 5 Thus, they rely on rely they Thus, 3 CEPR POLICY INSIGHT No. 104 July 2020 04 $480 billion to private bondholders. The remaining $55 billion are bank loans owed to to owed loans bank are $55 billion The bondholders. remaining private $480 to billion they now owe Collectively, over time. for first of them the most bonds, sovereign issued countries 58low- middle-income and decade, past the During bandwagon. the joined Republic –also Dominican or the Lanka Sri –Philippines, exporters Non-commodity bonds. of sovereign PDR of dollars or Lao billions Mongolia Jordan, –issued Colombia, Peru, –Ecuador, elsewhere governments Commodity-dependent Africa. Saharan sub- to exclusive not been has bonds sovereign with extravaganza The borrowing spree. borrowing the not stop did Clearly, warnings our bonds. sovereign over $90 in –issued billion grades below investment rated of them many – crisis? debt next world’s the for groundwork the laying governments, withshortsighted working markets, financial We “ wondered, debt shackles. in countries put these and borrowing more still would require bonds high-cost these servicing because irrational, and Countries (HIPC) initiative less than a decade earlier. adecade than less (HIPC) initiative Countries Poor Indebted Heavily under the debt relief received –had among others Zambia, and Senegal Ghana, d’Ivoire, –Côte $8.1 countries Anumber of these worth billion. bonds sovereign issued had governments 2013, By sub-Saharan ten market. capital international the money in raise to bonds sovereign issue to began governments African Many terms. more at attractive available of more liquidity, money became of dollars Note 1 1 2 2500.0 6 2013). Rashid, and (Stiglitz Africa sub-Saharan in particularly creditors, private from public borrowing of excessive risks the against warned we ago, years Seven bonds. sovereign is of this 2018. $186 in 2008 $535 from billion in to 90% billion Nearly decade, past the during three-fold nearly increased creditors private debtto owed sovereign Most alarmingly, 7 middle-income countries, 2000-2020 (LHS: billion US$; RHS: %of RHS: US$; GDP) 2000-2020 (LHS: billion countries, middle-income Figure 1 Source

000.0 500.0 000.0 500.0 private below). creditors, jumptheshipat signoftrouble(seethediscussion thefirst whooften initiative, burden, bytemporarily reducing openedupfiscalspaceforthese debtservicing governments toborrowfrom including 31inAfrica. Clearly, debtburden. problemofexcessive the HIPCdidnotsolvethesystemic Ifanything, the T hasreceived pandemic,incontrast tothecooperationfromIMF. ofthecurrent midst thecountry ‘sudden stop’), andistypically to farmore –illustrated restructure bythedifficulties difficult Argentinaisfacing inthe Borrowingfrompriv 0.0 he HIPCandtheMultilateral DebtRelief Initiative countries, provided $100billionindebtrelief todeveloping : Data for 2019-2020 are estimates 2019-2020 for are : Data : International Debt Statistics and the World Indicators. the and Development Statistics Debt : International

Total external service Total GDP) debt of (% external (PPG)guaranteed Publicandpublicly ate creditors ismuchmore more expensive, likely tofaceproblemswithrollovers(theinfamous E xternal debt stock and servicing burden of 111 low- and and low- of 111 burden servicing and stock debt xternal 6 As quantitative easing in advanced countries injected trillions trillions injected countries advanced in easing quantitative As ” During the next seven years, African governments governments African years, seven next the ” During Private nonguaranteed (PNG)Privatenonguaranteed 7 We thought it was reckless We reckless it thought was are shortsighted shortsighted are 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0% % % % % % % % % % CEPR POLICY INSIGHT No. 104 July 2020 05 capital quickly flowed back to developed economies, and many of these countries are are countries these of many and economies, to developed flowed back quickly capital world the hit economy,stopped, pandemic of the debt new flows faucet as the soon But as not default. did Lanka or Sri Montenegro Lebanon, Mongolia, like countries that –ensured fundamentals –not economic market capital international the in liquidity Abundant open for them. remained window borrowing external long the as so manageable remained countries debt of these borrow. it could The external because 2018 revenue in ( export total its more than was for Mongolia’s example, on debt. new taking debt service, debt and over existing rolling –by avoided debt –and adebt crisis external their serviced countries of these Many 2009. in Recession Great the during 5% only by about declined developing countries from 2020. exports ForJanuary reference, 30% by nearly since have declined prices commodity that given year, this exports 20% in decline least at experience will developing countries suggest UNCTAD and Note: 1 2 3 4 5 6 (RHS) %of exports as burden servicing debt average Figure 2 ( years ten past the during issued were bonds 70% sovereign lenders. More of than these private other and banks commercial 10 9 8 decade. past the GDP revenue during to decline of tax ratio saw their countries of these two-thirds more 2018. than in time, billion same the At $47 from 2008 $117 in to billion –increase repayment plus principal –interest burden public debt servicing annual saw their bonds sovereign with borrowed that Countries their external debt (other than by borrowing more). debt (other by borrowing than external their service to countries for these exchange of foreign source main the are revenues Export $6.3 2008 $10.9 in to billion 2018. in billion from debt servicing, in increase dramatic aless experienced bonds sovereign not issue did that by over 16% 2008. declined since GDP Countries revenue to has ratio tax the Source 0 0 0 0 0 0 0 trade. worldtrade 13%and32%in 2020;UNCTAD tofallby between WTO expects The (2020b)predicts a 20%fallinworld El Salvador. Remittances account formore than15%oftheGDPTajikistan, Jamaica, Lebanon, Honduras, Senegal, Guatemala and For anumberofcountriesremittances, whichhave beenbadlyhitbypandemic,are source akey offoreign exchange. 2019, withfallsofthree percentage pointsormore inalarge numberofcountries. IndicatorsDevelopment oftheWorld adeclineintheirratios Bank),ofwhich27countriesexperienced during2008- data are available tax-to-GDP for42low-andmiddle-incomecountriesthatThe issuedsovereign bonds(fromtheWorld ...... 0 0 0 0 0 0 0 Data for 2019-2020 are estimates 2019-2020 for are Data : International Debt Statistics, the World the Bank Statistics, Debt : International 2000

2001 2002

2003 and billion) US$ in (LHS, bonds of sovereign issuance Annual 2004 A A

v n 2005 e n r u a

a 2006 g l

e i s

d s 2007 u e b a n t

2008 c s e e

r Figure 2 Figure o v 2009 f i

c s e o

v ( 2010 % e r

o e 2011 f i g

). e Figure 3 Figure n x

b p 2012 o o 9 r n Latest forecasts Latest t d

s 2013 s )

( U 2014 ). It did not face a debt crisis ). adebt crisis It not face did S $ ,

8 2015 b In Angola, for example, for example, Angola, In i l l i

o 2016 n ) 2017 10

from the WTO WTO the from 2018 2019 2020 3 0 5 1 1 2 2 3 5 . . 0 5 0 5 0 0 0 ...... 0 % % 0 0 0 0 0 % % % % % % CEPR POLICY INSIGHT No. 104 July 2020 06 Source this Policy Insight focuses is how best to manage the debt owed to private creditors. creditors. private to debt owed the manage to how is best focuses Policy Insight this on which issue ($65 critical the this Thus, bondholders. private billion) to paid be must of 2020. in half repayment About principal and interest $130 in billion service to need still will countries governments challenges, debt) fiscal mounting and over of existing a‘sudden (or lending new in stop’ capital, rolling- international of tightened backdrop the Against the pandemic. fight to spending sector social and health increase to pressed hard are when governments revenue time ata fiscal in declines sharp into translating home at are activities of economic contraction and exports The falling commitments. their dollar-denominated meet to them for more difficult the it all makes of course, spiral. of 2020, adownward into beginning the or more since by 15% depreciated have already which currencies, put their likely, will increasingly is which on reserves, Arun pandemic. the before 40% reserves ofdebt their –exceeded sector public private and of both servicing –i.e., burden debt servicing total whose 4 Figure But as debt. their service to reserves foreign to turn have to will countries diminish, remittances and earnings export As 11 1 Table follow soon may suit. others, among many Zambia, and Mozambique, Suriname Gabon, and default in already are Lebanon and Ecuador ofnow default. verge on the

Debt servicing to exports Debt servicing to GDP External debt to GNI Average ratios (%) c. Total external debt servicing($,billion) b. .Total external debt stock ($,billion) a. Number of countries withprivate sector external debt Number of countries desirable, with benefits exceeding there thecosts, desirable, withbenefits are still costs. A runonr Public andpubiclyguaranteed debt servicing Debt service onprivate sector debt Private external debt stock Public andpubliclyguaranteed debt stock Total repayment of principal Of which, Total repayment of principal Of which, Private creditors Bilateral Multilateral Private creditors, of which Bilateral Multilateral : The World Development Indicators and the International Debt Statistics Debt International the and World: The Indicators Development Sovereign bonds

eserves will force thoughsuch capitalcontrolsmay somecountries toimposecapitalcontrols;andeven wellbe eserves D ebt stock burdens of low and middle-income countries middle-income of low and burdens stock ebt 2018 points out, there are many countries countries many are there out, points outstanding Countries sovereign 11 A depreciated currency, currency, Adepreciated bonds ,9. 209.5 1,091.6 1,791.3 258.4 494.9 338.3 476.4 699.7 with 273.7 156.9 116.8 62.2 25.2 29.4 62.9 23.6 75.4 148 8.2 58 53 Countries sovereign with no bonds 329.8 120.3 40.6 90.4 42.5 34.6 78.5 23.7 10.9 11.5 4.4 6.4 4.5 5.4 29 53 6.1 0 1 CEPR POLICY INSIGHT No. 104 July 2020 07 C sovereign bonds, 2008 ( 2008 bonds, sovereign Figure 3 ( 2018 bonds, sovereign issue Figure 4 Source Source: o P K n a y g r p o G g C , y u M a o Z D z N m M n i

a a e m R i g D B b c u U m G a

e M o a b i r j u N u a g p u i r , . a i b r The World Development Indicators, The World The Bank World The Indicators, Development r t C K a

, u y a : International Debt Statistics Debt : International G R E u R b a i o e o h T n a � g b n e a e w n H l u h d n u a C T M u w l u p p i d

n i S d � z R a a e a e S a c s L A P . i o . o a E E a 0

J t G

U a

r e A a o o . a G r a e j t c A t i n l 0 k i

o b m S l e h k m l e k % n k u L m v n d h u n b r a e o m i i m a i g a a e u s o a s a s i g e a a r n r n n o d d g t t t b p i n o n n a b r g i o a n a a e k l o c a o r i l i i l i i i i i o a a n a a e n n a n a a a a a a a a s r r 0 . Debt servicing burden of selected countries that issued issued that countries of selected burden servicing Debt Debt servicing burden of selected countries that did not not did that countries of selected burden servicing Debt 0 1 % 0 0 . 0 % 2 0 2 % of total exports) 0 . 0 0 . 0 % % % of international reserves) 3 4 0 0 0 . 0 . % 0 % 4 0 0 . 6 0 % 0 . 0 % 5 0 0 . 0 % 8 0 . 0 % 6 0 0 . 0 % 1 0 0 . 0 % 7 0 0 . 0 % 1 2 0 8 . 0 0 0 % . 0 % CEPR POLICY INSIGHT No. 104 July 2020 08 1 1 2 250.000 an average 1% average an ayear). by contracted Burundi, and Angola countries, African poorest of the of two income (the capita per countries successful decade) least the 7.3% and past the during year per of average by an (the grew GDP of China capita per more of successful the performance disparate the awhole masks as developing and countries markets of emerging success The Recession. Great the from recovered never fully Africa, in especially countries, of many exports fact, In decade. past the during declined countries of these many of earnings export 2005. in were Not they surprisingly, than lower today are export S running positive net financialaccount balances. creditors, were net countries middle-income of and low- majority a crisis, financial the Before years. ten for last the levels pre-crisis below the consistently remained countries ( years six (excluding index 80% last price the by more in gold) than declined commodity The all- slow growth. economic experienced developing most countries decade past the during Unfortunately, debt. the service to increase enough of that capture can government debt, sovereign of case the in as, so and long output sufficiently real public not debt aproblem is long so it increases of level external the in increase An PAYMENTS OF BALANCE DISEQUILIBRIA 12 The net financial account shows net acquisition and disposal of financial assets andliabilities. Itmeasuresnet anddisposaloffinancial assets acquisition how financialaccountshowsnet net 12 The greatly increased deficits account 1999-2008 current 2009-2018. 5.8% the to during while And investment. for increased than rather consumption, increase) to (and some case in sustain to used co middle-income and low- of many balances slowly, account current the or growing declining exports With 2020 =100) June (2016 Figure 5 countries. countries. sums of huge accumulation the more investment, to didn’t lead borrowing the Because 6 in Figure balance account financial net negative by the indicated year, after year abroad from borrow to had they balances, account debt they accumulated, the more they needed to borrow to service their debt. Even debt. their service to borrow to needed more they the accumulated, debt they 00.000 50.000 00.000 50.000 o current andcapitalaccounts(source:current World Indicators) Development lending toorborrowing fromnonresidents isfinanced,andconceptually equaltothesumofbalanceson 0.000 u r ce: of external debt did not increase the real output of low- and middle-income output of low- middle-income and real the not debt increase did of external Figure 5 Figure IM after after

Much 2005M1 ,

The h 2008,

ttps://data.imf 2005M8

2006M3 countries low- middle-income and these that of commodities ). Prices growth growth of the borrowing was just to meet their debt obligations. The more debt obligations. their meet to just was borrowing of the All

net inflows of foreign direct investment (FDI) to these developing theseinvestment (FDI) to direct offoreign inflows net 2006M10 2007M5 to 2005 January gold, excluding index price -commodity

rates of fixed investment fell from an average 12.3%of an average from during fell investment of fixed rates 2007M12 . org/?sk=471DDDF8-D8A7-499A-81BA 2008M7 untries turned negative, but the fo the but negative, turned untries 2009M2 2009M9 2010M4 2010M11 2011M6 2012M1 2012M8 12 With persistently negative current current negative persistently With

. 2013M3 2013M10 2014M5 -5B33 2014M12 2015M7 2C01F8B9 reign borrowing was was borrowing reign 2016M2 2016M9 2017M4 2017M11 2018M6 2019M1 2019M8 2020M3 CEPR POLICY INSIGHT No. 104 July 2020 09 - - - - Figure 6 debt-trap. known well- and avicious in caught appears Covid-19,before developing countries many 14 Bureau of Economic Analysis, “The United14 States Bureau International ofEconomic Analysis,“The Investment Position” 13 Total oftheFederal assets Board Reserve increased 2008to$4.5trillioninFebruary from$900billioninSeptember IMF. the through engineered often past the in by governments, of bailouts long of the history because partly perhaps obvious, is do so to failed have often they on That behaviour. such acheck provide to supposed who are do so. It to creditors the is have incentives they credit, cheap get can they if leaders: of political part on the termism of short proclivity natural repay). to Moreover, capacities a is there assessing judgements and risk making in experts the be to supposed are creditors the more some so, as ways in (indeed, debtor the as blame much to as is creditor the bad, whenever adebt goes and arrangements voluntary are But debt contracts countries. debtor on the blamed be to tend crises Debt recovery. 2008-2015during stimulate to sheets balance their to dollars trillion $4.4 more than added ECB the and Reserve the Federal easing measures, (QE) Under quantitative systems. financial their into more liquidity by injecting crisis the to responded Europe and States United the crisis, financial global the caused leverage and liquidity excessive believed generally it is While COUNTRIES CREDITOR THE OF ROLE THE BUBBLE: SOVEREIGNTHE DEBT World the Bank Statistics, Debt International Source: bonds, for example, has more than doubled since the global financial crisis. financial global doubled the since more than has for example, bonds, sovereign developing and country holding The of US’ emerging developingin countries. debt instruments and equity money chased QE the Europe, US the and in investment and credit boosting of cheap money. with Instead markets financial low flooded and middle-income countries, 1990-2018middle-income ($ billion) 1 1 2 2 2 1 1 - 5 0 0 5 5 0 5 0 5 (https://apps.bea.gov/itable/itable.cfm?reqid=62&step=6) ) balance/html/index.en.html by about€700billionduringDecember2008 andDecember2015 (source: https://www.ecb.europa.eu/pub/annual/ 2015 (source: https://fred.stlouisfed.org/series/WALCL oftheEuropeanCentral Bankincreased totalassets ). The 0 0 0 0 0 0 0 0 0 0 ...... 0 0 0 0 0 0 0 0 0 0

2000 Trade, 2001

2002

N N T 2003 r e e a t t d

ﬁ s e e n

2004 b c a current o a n l n c a d i n

a 2005 a c l r

e a y c

i c

n 2006 o c u o n m and

t 2007

e b a l a

n 2008 financial 13 c The QE – as designed – kept interest rates rates – kept interest designed – as The QE e 2009

2010 C N u e r t r

p account e 2011 n r i t m

a a

c 2012 r c y o

i u n n c 2013 t o

b m

balances a e l

a 2014 n c e 2015

2016 of 2017 14 low- 2018 - - - - - 0 1 2 3 4 and 5 4 3 2 1 . 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 . . . . 0 0 0 0 . . . . . 0 0 0 0 0 CEPR POLICY INSIGHT No. 104 July 2020 10 as exports and remittance inflows, largely out of the control of thegovernment. control the of out of largely inflows, remittance and exports as such on factors, depends debt of agovernment sovereign service to exchange of foreign quickly. The availability diminish earnings one, export where current the as such crisis economic aglobal during scarce become which or euros, dollars in are obligations debt its currencies, local in collected of agovernment’s are revenues all almost While acrisis. during problem’ worsens –also ‘transfer –the challenge The second pandemic. the curb away to money needed takes debt the servicing because and downturn economic of the severity of the because both pandemic, this in worse even are Matters worse. things make only can downturns economic during taxes Raising revenues. fiscal required the collect to government the for harder even it making suffers, recovery economic prioritised, is debt payment If debt obligations. their service revenue to aside setting and recovery stimulate to spending between trade-offs difficult face Governments crisis. economic an during worse gets which problem, the‘payment’ as problem first the to referred Keynes issues: related three address to need we To debt sustainability, achieve response. asystemic needs which debt sustainability, to shock systemic a presents crisis current The by a shock. affected debt be may that service to ability country’s the that thefact spite of in fixed, are Payments contingencies. possible for all account cannot they as imperfect are debt contracts of times, best Even the in debtor. of the trade of terms and rate exchange thereal affects how of debt borrowing and externalities macroeconomic the addressing without imbalances account current of chronic thesolve problems cannot Andwe of thedebt. form take typically of FDI, inflows imply deficits account Current balances. account current and trade affect that factors underlying addressing without sustainability debt ensure and developing in countries debt crises We prevent recurrent cannot PRIVATETHE MACROECONOMIC AND EXTERNALITIES BORROWERS worse. even downturns Covid-19 their making by – afflicted countries those from at – least outflows capital more see may we a prolonged recession, now. experience developing If countries The bubble adebt bubble popping is developing to countries. exported basically QE 15 depreciation of the exchange in the event of a shock will depend on how much they will event of ashock the in exchange of the depreciation of the magnitude the that –for example, decisions borrowing of their externalities for regard any without creditors foreign from borrows sector private domestic the 2008. 60 in up allowed, from When debt, external sector private had Policy Insight this of of discussion centre the problem. 2018, In are which transfer 82 111 of countries the the exacerbate further sector by private borrowing by the generated Externalities through a contraction in imports, broughtabout at great inincome (i.e.,throughausterity). throughacontraction inimports, cost through acontraction Traditionally, isimports. underthecontrol ofthecountry one factor The forced muchoftheadjustment oncountriesis c. b. a.

creditors. creditors. and debtors of private behaviours of the externalities macroeconomic and adebt contract; in stipulated as or euros, in dollars the make payment to currency of sufficient foreign availability the debt obligations; external its to meet government of a means financial the capital inflows, and in the absence theabsence in and inflows, capital 15

CEPR POLICY INSIGHT No. 104 July 2020 11 recurrent debt crisis in developing in countries. debt crisis recurrent avoid to are we if account into taken be must which for government, expensive and more difficult debt servicing make creditors private and borrowers sector private of the actions of the The externalities sector. private the from exchange for foreign demand speculative and precautionary both increases rate exchange the in afall arise: can dynamic adverse An debt obligations. foreign its service and currency foreign required buy the to for government the harder it becomes depreciates, rate exchange the As depreciations. rate exchange trigger capital of outflows The quick actions. of their for externalities the money,out regard their any without take to rush –typically developing in countries borrowers sector private and sovereign both to exposures with – creditors private crisis, of a sign first the at Similarly, abroad. from inflows capital short-term with associated externalities (and firms) other borrow.similar are There 17 16 June of 2020.as countries, of for debt months payment 27 poorest six cancelled has for ayear. The IMF countries for poorest the debt relief announced have already members number of G20 A principal. and interest both repayments, external-debt on all standstill two-year al (Gelpern et clauses action collective solution, activating based for a market- have called Others countries. African the from billion $44 including year, this debt repayments waive to numerous calls haveThere been debt standstill. al. et al. et (Berglöf countries for low-debt middle-income relief and for immediate world the call have the joined around academics and Policymakers III. Calls for urgent actionandstandstills that the countries not paying the debt service in 2020 must repay the full amount amount 2020 full in the repay must debt service the not paying countries the that means which neutral, (NPV) value present should net be standstill the that suggests OECD (2020). the to according not debt April relief, in respite, Agreement The G20 2020. a in wouldbe This creditors bilateral their to wouldhave paid countries these $16.5 most at wouldcover G20 by the proposed that billion standstill debt servicing the OECD estimates, to According ‘blend’ countries. World so-called the and Bank the of window lending concessional the or (IDA) credits Association Development for International the eligible are that countries and Countries Developed Least the including -income countries, low- 77 middle only and cover G20 by the proposed The measures scope. however, have, of limited far been so adopted The standstills limited. be will astandstill with cooperate than rather court to go to incentive the so small, be will be) losses (assumed the to is period short, the since that is standstill of a debt advantages theOne of should so finance. standstill, a into world of the goes rest the as more symmetry: demands Equity charges. and fees pay additional debt have may to for obligations serving honour their cannot who those and worse, interest, charge to continue havethey not – markets financial put on been hold world of the pandemic, by the has rest the While internationally. as well as apply domestically which for standstills, such rationale astrong is There

Lending-Tracker#CCRT). face value ofthecancellation The isabout$240 million(seehttps://www.imf.org/en/Topics/imf-and-covid19/COVID- earnings(say,rate falls,thedollarexport thedebt) automatically falls. toservice exchange ratemagnitude oftheexternality is,however, falls.The smaller,exchange perhapssignificantlyso,sinceasthe torepatriate say,rise toanexternality; asthe ownersofthebondtry their earnings(converting, pesosintodollars),the Ifthere butissuedtoforeigners are give bondsdenominated currency indomestic nocapitalcontrolsinplace,even , 2020) as we described earlier. Much of the attention has centred around a around centred has earlier., 2020) Much attention of the described we as 17 , 16 , 2020; , Okonjo-Iweala ., 2020) for to aone-

CEPR POLICY INSIGHT No. 104 July 2020 12 poorest countries in Africa. in countries poorest for the debt relief for modest the call G20 the rejected Working already Group – has Creditor Private Africa –the group creditor private established The newly standstill. a accept not easily will creditors however, private that concern, legitimate is There creditors. multilateral and over bilateral of claims seniority have creditors private It would suggest entities. sector of private cost borrowing the to relative of governments cost borrowing the increase will which debt, sovereign than safer deemed be will developing in countries corporations The debt of private precedent. acostly set it will debt payments, only,debt payment not on and private bilateral credit. official as counted debt is what and countries debtor and creditor of the participation the on depending smaller, significantly be could amount standstill The actual loans. for non-concessional high quite 2021). be in could amount The accrued 2020 2021 in and –over period 2022-2024 interests (with agrace accrued – including 21 According toNew York Civil Practice andRules Law (CPLR),NYCPLR§5004, thepre-judgement interest rate for 20 “Private Creditors debtrelief blanket forAfrica”, pushbackagainst Reuters, 15May 2020. andequity investors toensure19 Thereare shouldapplytobothportfolio equity alsoconcernsthat astandstill between is,loansfromindependentgovernment18 That agencies andgovernment ownedenterprisesmay ormay notbeincluded of interest (Zuckerbrod, 2017).of interest overdue all payment on a collect 9% pre-judgementto penalty creditor a plaintiff New York law allows pre-judgement and penalties. state fees legal in millions countries developing end may up costing governments), foreign suing debt standstills creditors US (especially creditors favour York traditionally New York that given law and courts by New governed are bonds sovereign of outstanding thirds two nearly that Given creditors. recalcitrant of afew hands the in power enormous puts This interests. accrued and amount principal of full payment immediate demanding creditors with acceleration, trigger can This debt. outstanding other on all default as qualify on one bond can default atechnical means which clauses, include bonds cross-default sovereign Many debt servicing. demand bondholders still may and creditors other a debt standstill, to agree voluntarily of creditors agroup If for themselves. deal abetter get order to holdouts in as for below), act some(discussed bondholders to incentives are there provisions trusteeship and clauses action collective of strong absence the in Indeed, disarray. total it means if even standstill, block the –to coercion political and legal including – disposal their at means every use will creditors private that is The fear debt relief. debt they owe to private creditors. private owe to debt they the service to liquidity the them it wouldsimply give help country; debtor to the little do would standstill their that concerned be rightly may creditors Official palatable. It work. to wouldnotsufficient. be It politically would be not unlikely is creditors official only involving Astandstill creditors. private including comprehensive, be must standstill –a efficiency economic and equity –inter-creditor For numerous reasons countries. poorest of debt the burden the reduce and restructure to members G20 the from no call is There market. capital international the in loans concessional non- to access country’s the it wouldcurtail as initiative, G20 under the standstill (see http://www.nysb.uscourts.gov/sites/default/files/opinions/147779_26_opinion.pdf breach casesis9% perannum,andaccruesonasimple,rather ofcontract thanacompound, basis some ofcapitalaccountmanagement may berequired. andtheexchangeassets rate, generatingexternalities. significantadversemacroeconomic To addressexternalities, these on thecountry. investors attempt Still,asequity itdepresses andportfolio value toselltheirassets, themarket ofthese But there isadifference: creditors withdollar(orforeignexchange denominated) debtsimpose afixed dollarobligation Indebt payments, debtholdershave circumstances, mightseemperverse. most seniority ofclaimsoverequity holders. creditors andinvestors. Allowingequity investors out,whilepreventing totake creditors theirmoney fromreceiving under therubricof‘official’ debt. 18 Kenya, for example, has indicated that it would not request adebt it wouldnot request that indicated has for example, Kenya, 20 It is unlikely that they will cooperate on a larger-scale on alarger-scale cooperate will they that It unlikely is 21 While the objective of pre-judgement interest is is of pre-judgement interest objective the While 19 Furthermore, if the standstill is enforced on public public on enforced is standstill the if Furthermore, ).

CEPR POLICY INSIGHT No. 104 July 2020 13 debt burdens, while securing favourable terms, and helping to restore the balance balance the helping restore and to favourable terms, securing while debt burdens, reducing debt –significantly restructure to used be can standstill by the provided time debt problems, the long the run address doesn’t adequately a standstill While efficient. not Pareto is bargaining of outcome unbridled the general, In gain. can they what more debtor, than the and far lose creditors, other if even stances, of bargaining ‘tough’ pursuit the through more for themselves, grab can they that believe may Some creditors of debt renegotiations. context the in greater even are these debt; and private with associated some externalities of the noted have already case. We the is not that that known efficient is well But it outcome. an would ensure bargaining, free through markets, that would ensure ‘rationality’ that therefore, conclude,might One suffering. debtors and creditors both with sum, negative be to proven has late’ too little, of ‘too The strategy game. simply azero-sum think, to seem pay, to won’t don’t they pay. resources have the countries some creditors as It not, is the If countries? thedebtor of interest the protect it sufficiently disorderly, will and orderly it be or is: will question key the of debt some restructuring; be form will there issue, at cases of the most In orderly debt restructuring. an be there that community, international the and countries debtor of the perspective the from both It critical, is cooperate. But the evidence to date is that many may not. may many that is date to But evidence the cooperate. to persuaded be could thecreditors if of benefit, considerable wouldbe arrangement an Such debt. external their service to used wouldhave otherwise governments debtor that of funds use appropriate the monitor and World the manage like to Bank institution a multilateral group Theproposes the pandemic. fight to funds emergency as payments interest use deferred effect, in to, relief temporary seeking acountry allow al (Bolton et creditors private and official both to services on debt a12-month standstill activate to debt relief seeking (CCF) country for each facility credit of acentral establishment the have proposed for instance, lawyers, and of economists A group mechanisms. voluntary other about raised are concerns Similar lower. significantly is rate now, interest as when, market the especially borrowers, sovereign for abondholder sue incentive to an provides rate 9% interest this compensatory, 23 And including quasi-public agencies, which sometimes act like23 Andincludingquasi-public agencies, private act creditors. which sometimes 22 Perhaps more promisingare thedebt-for-nature swaps.In debtorcountriesmake oneversion,forinstance, to private creditors. owe countries on debt these especially and including comprehensive, be to needs relief Anddebt countries. middle-income also for but afflicted, badly be will that countries for poorest not the just true is This for comprehensive debt need restructuring. clear a is there required: be will astandstill more than For developing countries, many insufficient. is proposed, been has what even and done, been has What debt burdens. higher even with countries saddle but could crisis help delay adebt will debt relief piecemeal and ayear. Ad-hoc much longerlast than will impacts economic its and The pandemic post-pandemic. sustainable notmay be pandemic the to prior sustainable seemed that debts even that fact the doesn’t address it particular in and earlier; debt problem discussed doesn’t fundamental solve the accumulating, interest without even Astandstill, problem of developing countries. debt systemic solution the to asustainable end for achieving an to ameans as viewed problem. It be must systemic for a much larger band-aids at most, are, measures these palliative; short-term just is implemented, and however designed A standstill, problem discussed above. problem discussed credits beingtransferred ofvalue tothecreditors, tothecreditors.provide something thetransfer whilealleviating These that generatecommitments tomake inlocalcurrency) investments (mostly carboncredits inthefuture, withthecarbon 23

22 ., 2020). would The CCF CEPR POLICY INSIGHT No. 104 July 2020 14 effectively exempting the vulture funds. vulture the exempting effectively of $500,000, excess in thus transactions exempting aprovision New York passed State funds, vulture Underthe of influence the orderly debt preventing restructurings. in role have played acentral such which funds, vulture model of the business the course, of is, This value. full recover to of suing intent the with discount atdeep of bonds buying the preventing (called ‘Champerty’) New York have aregulation to used holdout debt restructuring. sovereign problems in the minimise to pre-judgementpenalties down to bring efforts concerted be to needs There creditors. of influence of the aresult 2020, as presumably April in enacted was it as legislation budget the from have disappeared to doing seems so but provision the payments, forcompensation deferred adequate intent theof providing reflects better one which to level usurious current its from down rate interest the bringing proposed of New York The Governor debt restructuring. a successful reaching to a deterrent as even worse (for example, weakening the collective action clauses). action collective the (for worse even weakening example, debt problems future make will that provisions contain bonds restructured newly the that demanding are some creditors worse, even matters Making facing. are crisis in currently countries the that negotiations ongoing by difficult the and evidenced as more even difficult, be will debt restructuring in cooperation such getting is, standstill ina action voluntary cooperative getting as difficult as Unfortunately, acrisis. plunges into actually country done the be before restructuring such that preferable it would be and of time, period extended an takes typically restructuring Debt clauses. action collective as such procedures, bankruptcy and trusteeship to related provisions and options payment state-contingent including – bonds new and existing for conditions and terms better incorporate to used be can Ideally, restructurings such equilibrium. of payment 26 A subsequent Court ruling broadened the scope of the exemption, saying rulingbroadened thescopeofexemption, that there have 26 AsubsequentCourt didnotactually tobeanactual 25 Pre-judgement interest wasfixed at 9%in1981whenformer Chairman, Federal Reserve Paul Volcker, raised borrowing 24 For andcritiqueofthismovebyseemingly responsible creditors adiscussion like Blackrock,seehttps://www.project- New York in on interest pre-judgment 9% the to interest Earlier, referred we adifference. make can New York jurisdictions laws), by these English and actions so (namely, under jurisdictions few arelatively in issued are bonds Most of the measures. standstill support to anumber of actions undertake can countries The creditor crisis. adebt postpone only help them will which relief, insufficient receive likely will they creditors, private and official their with bilaterally negotiate they if concert: in act to need will markets emerging and developing the countries that It obvious should stability. be economic and for peace implications its with catastrophe, for avoiding a debt imperative economic an but as imperative, a moral as – not just collaborate to countries creditor and of debtor governments require will This sticks. and of carrots acombination be have to will There debt restructurings. necessary the and standstills activate to measures administrative and of legal a combination deploy to need will governments developing country challenges, extraordinary the Given sector. private the from forthcoming not been has cooperation necessary the that but suggested of attention, centre the been far have so that standstills the beyond go that comprehensive actions and for urgent need the outlined section The previous IV. Achieving comprehensive debt restructurings payment of$500,000,onlyanobligation. 27 May 2020). outinflation tostamp (“Newcosts Lawmakers’Last-Minute York Move May Argentina Cost Dearly”, Bloomberg News, syndicate.org/commentary/argentina-sovereign-debt-rules-creditors-by-joseph-e-stiglitz-et-al-2020-07 26 24 25 that acts acts that CEPR POLICY INSIGHT No. 104 July 2020 15 better way of risk sharing between creditors and debtors. and creditors between sharing of way risk better later) a (discussed would represent that contracts for state-contingent the substitute a partial are of law, they of economics: that but from perspective the donot so from we these, presenting In subsection. next the in reviewed principles of longstanding anumber with consistent as viewed be can discussed have we just The perspectives which can significantly address the ‘holdout’the problem. address significantly can which (Buchheit al et creditors by private attachments from assets country’s debtor protect to lines along these calls been has There pensioners. its to obligations and assets city’s the protecting while haircuts steep securing bondholders, to owed Detroit of city of the $18 debt that billion restructuring the guided 9procedures Chapter creditors. the private of claims over financial priority have should – others among pensioners, to commitments honouring and citizens the to services basic –providing of apublic obligations entity simple:The idea is social public the debt interest. in their restructure to public to power entities and protection significant give 9procedures Chapter the borrowers, for private designed procedures bankruptcy the Unlike claimants. contractual formal the than validity or greater have may equal ‘claims’ whose claimants, informal the recognise to and provide, they that public services essential the provide continue could public authorities that ensure to creditors, of private claims the (municipalities) governments against local etc.) of centres, recreation hospitals, as such public assets (pension funds, assets the protect to Depression height the Great of the during adopted Congress that Code US 9of the Bankruptcy of Chapter part are that of understandings kinds debt the sovereign governing laws into –putting framework legal the clarify to wouldbe crisis of a debt theface in restructurings debt way of encouraging effective Perhaps most the of stress. times in bond prices in decreases larger to lead time same atthe holdouts, it could though and lending risk high- both year) per would discourage (say, return gains real a 7% capital on excessive surcharge rate) of, say, similar and excess 4% in US the treasury above (rates of return earnings excessive on surtax a instance, For incentives. affect may taxation Finally, returns.) risk-adjusted excessive yielding market, perfect from afar is markets emerging and developing to countries market credit international the that evidence is There performance. improve economic actually can constraints such markets, competitive imperfectly how in emphasised has years recent in economics in (Research reduced. wouldhave been countries on burden the the occurred, lending the if wouldhave meant, and lending such have discouraged would both rates interest on these Constraints internationally. lending excessive encouraged surely have almost rates interest high Similarly, constraints. usury of these repeal the to attributed been has decades recent in observed lending predatory and instability some financial of the Domestically, of neoliberalism. era the in disfavour upon with looked be to came constraints regulatory such world the until around frameworks of legal long part had been rates, interest excessive regulating provisions, Usury 28 Indeed, ofstate contingent are that notonlyisthere set butthecontracts exist contracts, anabsenceofacomplete United27 The Nations CounciladoptedResolution 1483 Security (22May 2003),whichencouraged government thenew contracts’, inways whichenhanceoverall economicefficiency. Many canbethought ofasgoingincomplete. in thissection someways oftheprovisionsdiscussed towards ‘completing off ofitsdebt,including$21billiondebt owedtoprivate creditors, sector withoutany hold-outproblem. and immunitiesidenticaltothoseenjoyed bytheUnited Nations itself.allowedIraq This toreceive 80% nominalwrite- andproceedsofoilsalesIraqassets “any against formofattachment, garnishment,orexecution”, according privileges in Iraq torestructure theroughly$140 oftheSaddam regime. Resolutionallpetroleum billion debtstock The protected 27

., 2013), 2013), ., CEPR POLICY INSIGHT No. 104 July 2020 16 of the impossibility of the ground on the relief temporary demand can adebtor debt contract, the in missing is clause majeure Even aforce if framework. legal the within in written be to why it has is which protection, majeure force do not bonds include automatic Most sovereign remittances. and of exports collapse the and of borders closure brought on by lockdowns, those including impacts, economic devastating and widespread its foresee not possibly could they apandemic, foresee could Even they if pandemic. the not foresee could clearly Governments contract. acommercial in of parties control the beyond circumstances of unforeseeable presence the in of a contract for breaking the phrase – a catchall majeure invoke force to pandemic current the in for countries debtor It reasonable is RELATED AND NECESSITY LEGAL MAJEURE, FORCE DOCTRINES 29 “Argentina demandforsurprise100-year bond”, seesstrong CNBC after it defaulted – which was more than three-times over-subscribed by investors. over-subscribed three-times more than was –which it defaulted after 7.125% a100-year issue to bond for $2.75managed years two 2017 in billion than –less Argentina fact, In Argentina. into inflows not prevent did capital controls currency 2019. September in them 2015, The in them reintroduce to only scrapped government previous the until 21st century of the part for most controls currency had Argentina no time. in Malaysia to returned investors international false; proved were warnings These country. the away from stay wouldforever capital international that and again Malaysia trust wouldnever investors that warned measures of these critics time, that At flight. prevent capital to repatriation on capital tax exit 2005). an introduced It also (Sundaram, proceeds of investment for repatriation period a12-month waiting imposed Malaysia – crisis financial 1998 Asian the September In into – one year unprecedented. Fund of the (prior) the approval without transactions international current for transfers and of payments making the on restrictions “ stipulates, 2(a) of Agreement Section Article IMF of the VIII, Article anytime, convertibility account capital restrict can countries While countries. developing debt for of external cost currency lower local the will This period. crisis the during currencies local vis-à-vis the dollar of depreciation asignificant to lead otherwise would which for dollars, demand global the help reduce and to developing countries to some reprieve give will convertibility account capital and of current suspension temporary A investments. portfolio and on debt payments including flows, of external set would apply a broader to which convertibility, account capital and current suspend temporarily could governments developing of country necessity, Under doctrine the 2014). 2012 in (Xafa, bonds sovereign of Greek restructuring the during value 46.5% face of the accept to creditors private played forcing a role in of necessity doctrine the that view Some experts debt payment. suspend –to crisis unprecedented an to response emergency an –requiring of necessity doctrine invoke the can asovereign clauses, majeure force includes abond contract of whether Regardless debt. for servicing circumstances impractical and extraordinary as seen be can the pandemic fight to measures of lockdown some form al et 2020; Weiss (Marmins, such include it as not explicitly does acontract if even event, majeure aforce as qualify can pandemic the that believe 2011). experts (Encinas, Legal cases some court in impracticable commercially of acontract performance the made which event, unforeseeable an as in 2008 crisis financial global the accepted example, (https://www.cnbc.com/2017/06/20/argentina-sees-strong-demand-for-surprise-100-year-bond.html). , 2020). The fact that most of these countries introduced a state of emergency or of emergency astate introduced , 2020). countries of these most that The fact or impracticability or of performance

. New York contract laws, for. New York laws, contract a member may not impose impose not may a member ”. Such measures are not are ”. measures Such 29 CEPR POLICY INSIGHT No. 104 July 2020 17 the remainder of the new 30-year bond (Congressional Research Service, 2006). Service, Research bond (Congressional 30-year new of the remainder the 5.0%6-10,years, years five for and for first 8.52% the rate for coupon interest 4.35% paying Argentina with 2005 in debt involved swaps, debt restructuring The Argentine collateral. buy the to IMF the from borrowing new and reserves foreign own of their a combination used countries American The Latin banks. US commercial to owed debt they uncollateralised on the some haircut received they although countries, of debt for these cost the increased implicitly requirement collateral This of principal. repayment guarantee to collateral hold to as buy US to treasuries countries debtor the 1989 debt in –required Pan Brady –under the American Latin of the restructuring the example, For provisions. costly and more difficult impose to try often earlier, creditors the pandemic). fight we as (ormentioned But case, recover this cannot in country the period, agrace without pandemic; the with associated that as such downturn, amajor economic during important especially is period Agrace restructuring. of the terms the accept to of bonds) new incentives other issuance and the from proceeds with (often up front some cash creditors paying sometimes period, agrace with sometimes in face value, face in some reduction debt with existing retiring debt swaps, involves Most debt restructuring years. recent in contracts debt international into inserted have been that clauses action of collective kinds the or without with negotiations, on voluntary just relies No country restructurings. debt desired the wouldfacilitate that of debt contracts standardisation is required would be what most, at required; wouldnot be courts basis, on avoluntary fairly and done be efficiently always could orderly way. an in debt If restructurings claims competing out that sort courts is why,bankruptcy It we have difficult. domestically, is arrangements institutional under current arestructuring such achieving restructuring, orderly debt of an desirability why, seeming of the spite in explained we Earlier BACK BY BUYING BURDEN DEBT THE SOVEREIGN BONDS REDUCING interventions. of set appropriate the help might The coordinate IMF actions. such adopt to were countries one only or if two result might that signal adverse the reduce it will concert, in measures such introduce many If of countries. array by awide considered be should interventions such under which of circumstances a set clearly is The pandemic flows. capital volatile stemming at aimed controls capital of –have some Republic form the of Korea Indonesia and Brazil, –notably countries developing large Several debt crisis. Greek of the fallout the minimise to controls capital introduced Cyprus crisis. financial global the from for it pushed recovery as 2008-2018 during place in controls capital had Iceland Under programme, IMF an (IMF, 2016). circumstances under certain regimes management” account “capital of adopting advisability the recognised IMF the 2008 of the crisis, aftermath the In 31 Becauseinprincipletheexchange bondsare supposedtobe‘sustainable’ –whiletheoldbondswere not–itmakes 30 Althoughthere isadecrease greater infacevalue, bondsisoften value themarket value ofthenew thanthemarket of reasonable interest rate,entailed anincrease actually inpayments byArgentina. weremade itlooklike they where takingasignificant haircut, thepresent discounted value oftheirdemands, usinga dramatically was seenmost intherecentThis Argentine debtnegotiations, where some creditors made aproposalthat are ofthecreditors they not. areof thepublicrelations tomake wheninfact itseemasifthey takingabighaircut, efforts case shouldbelow–farlowerthanwhat liketheNPV. thefinancial markets toapplycalculate aspart It canbeviewed discounting andriskdiscounting.Andthe restructured sotheriskdiscountinginany debt is supposedtobesustainable, the value ofany promises concerning10yearsormore intothefuture. It makes noeconomicsense.It confuses‘time’ useadiscount rate often the financialmarkets of10%. For long-termbonds,suchahighdiscount rate greatly reduces bondsshouldpaysense that thenew lowerinterest. Thereisless risk.In bondsversustheold,thosein valuing thenew thedebt.Even ability thecreditors toservice enhancesthecountry’s restructuring benefit. the oldbonds.The 30 issuing new debt often with longer maturity and lower interest rates, lower and interest longer maturity with debt new often issuing 31

CEPR POLICY INSIGHT No. 104 July 2020 18 of these bonds, including the likelihood that they would not be paid. In their view, the view, the their In paid. wouldnot be they that likelihood the including bonds, of these value true the reflected price market the that argue efficiency, they market Assuming debt. remaining of price pushthe up they because inefficient as bond buy-backs al (Bulow Rogoff, et and 1988;Some critics Claessens adebt crisis. for averting strategy apre-emptive as backs bond buy- use to 2020.) have yet around governments sometime Developing country wouldhave matured that bonds discount and 2007). par 30-year mostly were (These US$154 1994 from bond holdings in billion US$10.7 to al., 2006 et in (Medeiros billion of Brady value total the reduced swaps and Bond buy-backs liabilities. their manage and risks reduce costs, debt servicing their reduce for debt new –to – or swapped cash with bonds Brady repurchased countries follow. American Anumber of Latin to debtors sovereign other encouraged debt buy-back Bolivian of the The experience 2019). world (Yadav, corporate the in widespread is buy-back Debt debt swaps. come with typically that terms avoiding harsher problems, while holdout coordination and costly overcoming in useful be thus may programme debt buy-back sovereign A voluntary earlier. months six debt swap the from received it than haircut larger €$10.8 for asignificantly only bonds new of its receiving billion, 50% back bought (€31.9 2012, Greece December In months. billion) €62 of its billion six than less in bonds issued newly their buy back to government Greek the prompted which creditors, law. favoured by Greek 2012 clearly governed were The debt swap in outstanding 86% bonds For of Greek reference, rights. of creditor strengthening asubstantial law, under English bonds new entailing all issue to required was –Greece 2005 the 2010 and during restructuring received Argentina which that than smaller significantly –though large was haircut 53.5% the old While its bonds. €198 of billion 2012 retire in to IMF the and institutions European from loans new €30 took and in €62 bonds new billion in issued billion Greece debt restructuring, ever largest the In more even instructive. perhaps debt is of Greek The restructuring 2005. in by Argentina received was than smaller thewas debt of value theface on The write-off zero. to close was on US treasuries rate interest 2013) (Hornbeck, benchmark when the coupon rate 8.28% an to it agreed as for 2010 Argentina, in costlier proved of debt restructuring workout (Setser, 2020). debt restructuring round The second Argentine current the dollar, on in the some cents 55 again, restructured being bonds these with even deal, agood receive to likely 2005, are in bonds holders bonds of the of these restructuring by the facilitated performance growth of improved IMF. the to Because loans its 8.6% 2005-2007. averaging during rate GDP repay able 2006, By to growth it was with rebounded, quickly crisis). the Argentina following immediately years the in it (i.e., needed when in grow to room gave Argentina package Thelevel. restructuring apre-determined exceeded GDP when its growth on coupon rates apremium paying – warrants offered GDP-linked also Argentina for creditors, the To deal the sweeten The restructuring offered Argentina a 75% write-off on a net present value basis. value netpresent ona write-off a 75% Argentina offered The restructuring 34 The buy-back, as expected, pushedupthepriceof remaining Bolivian debtto11centsonthedollar. buy-back,asexpected, 34 The 33 For 2004-2017, between example, US trillionoftheirdebt. corporations boughtback$1.9 notedintheprevious footnote,thesevaluations are32 As typically madeat anunreasonable discount rate. Using more million of its debt for of $40.2 its million million. $302 money, back bought own its donors Using Bolivia money and the from market. secondary the in dollar on the for 6cents trading were debts Bolivian These million. of $670 value a face had which debt, sovereign its buy back it could that so million $34 adebt crisis, facing was which 1988, In gave Bolivia, of Greece. donor countries reasonable numbersyieldsmuchsmaller write-offs. 33 There are also some good examples of sovereign debt buy-backs besides that that besides debt buy-backs of sovereign examples some good also are There 34

., 2011) sovereign have considered 32

CEPR POLICY INSIGHT No. 104 July 2020 19 dependent, and the rationality/irrationality of market players. of market rationality/irrationality the and dependent, be might country debtor the upon which institutions international or the country put debtor on either to the willing able is and country creditor the much pressure how pay and to willing is –how much country debtor the politics international and judgement of subjective domestic market’s the is price of market major determinant Moreover, cost. low a relatively at a relief debt substantial solution, offering attractive ahighly present bond buy-backs times, extraordinary these During bond prices. in swings drive often sell-offs panic and exuberance Irrational means. that whatever fundamentals, the reflect always do not prices seldomBond efficient. are markets We some credit debate. wouldmerit that know controversy this times, normal In participated while yields on Greek bonds actually fell after the announcement. the after fell actually bonds on Greek yields while participated 50% about earlier, only creditors of the described buy-back Greece the In case. the not always is this debt, of remaining up prices the do drive typically buy-backs While 1991). (Rotemberg, borrowers of power sovereign bargaining the improves buy-backs that argued have Others bond. the of price market the inflated artificially buy-back . (2011) argue than an intermediary –withsignificantfinancialpowerand etal.(2011)credibility38 Claessens –shouldorganize arguethananintermediary 37 GuzmanandStiglitz(2016) refer tothisas(negative) pseudo-wealth different36 Thus, creditors may have different judgmentsaboutthelikelihood ofthesovereign repaying. Thosewhosell 35 “Greece unveils bondbuybackplan”, Financial Times, 3December. increasing. welfare be can indebtedness in areduction situations, such In receive. goinghe to is (on (on he believes is believes average) creditor the average) more than pay far going to say, where, debtor situations the to judgements leading in of disparities importance the highlighted has Subsequent research judgments. on these muchput store too have may literature earlier the all; that’s guesses, are They judgments. for these basis multipliers, and delivering a large bang for the buck. for buck. the bang alarge delivering and multipliers, high with – timely, intensive, labour programmes recovery and rescue of pandemic part effective an be can (e.g., 2020) expenditures such al., et that Hepburn shown has research Recent adaptation. and mitigation change climate in money invested with risks, climate minimizing to contribute also butthe pandemic fight to expenditures public health should finance not bond only buy-back from The savings output. real boost will that long-term investments and of green conditions impose could initiative buy-back the forproposed support financing the on developing countries, measures austerity self-defeating of imposing Instead public goods. global promoting and on creating savings the spend to agree to for debtors the –is consequences global potential with avert might buy-backs such that disaster of the concerns humanitarian the –beyond buy-back the supporting in donor interest of way enhancing One countries. developing of bonds sovereign back forbuying support financial forsecuring ways finding while mind, in tragedy Greek the keep we that It important is debt crisis. the from recover fully to yet is Greece years. for several recession adeeper economy plunged into the of spending levels Lower measures. austerity implement to stringent Greece required EFSF and IMF the from support but this creditors, held bonds by private its buy back to Greece (EFSF) enabled Fund Stability Financial Europe the and IMF the from New loans BUY-IN DONOR SECURING of private creditors inthebuy-backprogram. describedbelow). It could attract bidders,alongthelinesof auction amounttothelowest broadparticipation certain mightmake purchase, senseifthe buybackwasnotsimplyamarket the buyback.This butanoffer (e.g.anoffertobuya that the ofthedebt burden economicprospects. thefact reduction enhances thecountry’s effect—and The higherpricecouldthus representexpectations. are nomore first pessimistic thosewiththemost thanaselection 37,38

36 There is no ‘scientific’ no ‘scientific’ is There 35

CEPR POLICY INSIGHT No. 104 July 2020 20 not been bought back to accept adebt reduction. accept to back bought not been have bonds whose of creditors cooperation on the and available, made are that funds of depend magnitude on the will do so it can which to Obviously, extent the crises. some debt least at averting and debt sustainability restoring amount, by asubstantial of debt developing burden the reduce countries could programme The debt buy-back resuscitate economies that may be devastated by the pandemic. by the devastated be may that economies resuscitate of Covid-19 to and demands health the meet to both programme, bond buyback the finance to debt new undertaken the servicing from freed are they which during period a grace need 2022. until Countries least at us with be to likely are aftermath backs, which would substantially reduce the likelihood of adebt crisis. likelihood the reduce wouldsubstantially which backs, bond buy- the fund to for Borrowing New Arrangements its use also can The IMF for lending”. used are position external strong with of members resources only that considering and buffer aliquidity aside setting (around billion 715 US$ after 1trillion), about of SDR for or lending ‘firepower’ acapacity into SDRabout translate billion 978 to “[t]he amounting that resources states Its website total creditors. current IMF’s private from bond buy-backs sovereign manage to expertise technical the has The IMF of members”. of payments balances international the in of disequilibrium degree the lessen and duration the “shorten to mandated prosperity.” is The IMF international or of national destructive measures to resorting without of payments balance their in maladjustments correct to opportunity with them providing thus safeguards, …[its to members] available under adequate temporarily Fund of the resources general the “making of Agreement, Article its in stipulated as responsibility such take to mandated is The IMF developing of the countries. on behalf operation buy-back bond the option for managing best the perhaps is The IMF behalf. on their buy back to facility the wouldlike they bonds sovereign the identify debt –will their restructure to seeking and voluntarily –participating Developing countries bonds. sovereign outstanding buy back to IMF the within facility international of an establishment We centre. immediate the at the propose IMF the puts proposal The following organised. be might bondat buy-backs effort acoordinated which in ways many are There A DETAILED PROPOSAL DESIGN countries actually invest these savings42 Amechanismwill needtobeinplaceverify countries actually that developing fromreduced debt –paying, debtrestructuring market-based say,41 Abondbuybackcanbethoughtofas a partial 40centsonthedollar(the theamount whether asealedbidauction, itissecond-priceauction, precise (e.g.,whether 40 The designoftheauction 39 Under theNew Arrangements toBorrow(NAB), theIMFcanborrowSDR365billion,equivalent to$500billion,from efforts. change climate and public in health savings of these equivalent the currencies, local in invest, to shouldrequired be relief the receiving countries measure, debt relief of this acondition earlier, as suggested we As that it will buy back only a limited amount of bonds. amount alimited only buy back it will that announcing auction, an conduct may facility repurchase bond the expenditure, given (SDRs) for a debtrights reduction or lend To donate them. could maximum the achieve drawing of special allocation full their not needing Countries institutions. multilateral and of countries consortium by aglobal supplemented provided be could by those burden inpublichealthandclimate change. Insight need tobeundertaken. debtmore may itstill That’scountry’s sustainable, notbesustainable. why inthisPolicy othermeasures we’vediscussed workout); isfromtheIMF. thiswouldnaturally money bethecasewhen the new Whilethebondbuy-backmakes the obligations needtobetreated new of 40cents.These asseniordebt(like ‘debtor inpossession’ financeina private price)todischarge market current debt(fromtheIMFor otherofficialsources) obligations current and takingonnew maximum amountofbondpurchase, atimelineandprice range foracceptingsalesoffers. Greek announcingthe The bondbuy-backin2012, ondebtmarkets. employedaDutchauction, forexample, experts to berepurchased inrevealed inadvance) are matters workingwith onauctions that shouldberesolved withexperts ready stand a numberofmembercountriesandinstitutions tolendadditionalresources. 41 42 40 The pandemic and its economic economic its and The pandemic

39 These funds funds These CEPR POLICY INSIGHT No. 104 July 2020 21 within five years. five within followed by another being restructurings of the half about little’, with ‘too been have also They uncertainties. extended the situation; alimbo into forced is country the losses, their avoid to recognising strive creditors as ‘Too because late’ late. too and little, too been have typically they that is though, past, the in restructurings debt The problem with debt restructuring. debt is The solution excessive to reasons for this arrangement, the justification of which would take us beyond the beyond us take would which of justification the arrangement, for this reasons good are There occurs. when this should not complain creditors private Accordingly, contract. implicit of the part it is markets; emerging and developinglend to countries when they (or is presumption creditors shouldlongstanding by be) private understood This ahaircut. take creditors repayments) adelay in when private even with often (though fulfilled fully being institutions these to obligations the with status, creditor preferred given been World the and have IMF traditionally the Bank Most importantly, backed. so not be may debt agencies of the some government while government, of the faith’ ‘full by the solved by taking on more debt seems, on the face of it, odd. of it, face on the on more debt seems, by taking solved be debt could problem the of excessive idea that the Besides, adebt crisis. exacerbate can austerity demonstrates, vividly so of Greece experience the But as debt. the service to exchange foreign providing and of payments balance the improving thus imports, in areduction to lead does often contraction economic painful the though revenue, government even less to leads which economic downturn, an induces tightening fiscal ‘solution’ this seldom works: the course, Of debt. existing its service to government the then helps to lendwhich offer more, creditors improve and problems’, ratings credit its ‘payment its minimises and belt its tightens government adebtor as soon as wisdom, conventional this to According solution avoiding adebt crisis. to universal the as promoted been has tightening Fiscal sustainable. become debt will – excesses fiscal its reduce will morea debtor prudent is if – i.e., government a debtor if Only balance. fiscal improving and spending government cutting around revolves restructuring on debt advice problems. The standard transfer and payment the as earlier to referred we what theis, ‘solving’ debtor, of that behaviour the on fixing narrowly focused of developing countries debt sustainability the enhance to attempts Recent V. Rethinking debt sustainability 46 In cases,creditors afew have suchcontractual attempted revenue streams, butwhether tocollateralize particular impedimentistheabsenceofany45 Aninstitutional international sovereign orany debt framework, international 44 For little, toolate’, oftheproblem ‘too abroaderdiscussion seeGuzmanetal.(2016). liquidity crisis,which is basically solvent;itfacesatemporary onthegrounds justified that thecountry 43 It is‘officially’ official and private. and official both debt, all comprehensive including be – to have also restructurings debt Effective their holdings.) off-load to managed they as creditors helped private for example, debt, Greek restructuring A delay in imprudent lending. of their consequences the escaping thus and bonds their selling with a collateralised asset than others. than asset acollateralised with some more be ‘secured’ may others, to senior be may some creditors debtors, private of case the In principal. general this to exceptions acouple of important are There others. to haircut of a less to provide be will effect main the that believe they if ahaircut take arrangements wouldberecognized inawell-designed sovereign mechanism isproblematic. debtrestructuring Paris Club. separately bytheParis respectively, Clubs, andLondon andthelargest official creditor, inthe China,doesnotparticipate (Stiglitz,2010). MakingExperts matters worseisthat officialandprivate creditor restructurings have beenhandled earlierinthisPolicy asdiscussed court, Insightbankruptcy andasrecommended oftheCommission intheReport donotsuffice. adjustments More adjustments. structural once theeconomywill bealleviated hasmadethenecessary thannot,however, often these 44 45 (Delays often have intercreditor effects, with private creditors creditors private with effects, have intercreditor often (Delays There will obviously be a reluctance among some creditors to to among some creditors areluctance be obviously will There 46 In the case of sovereigns, some debt is backed some backed debt is of sovereigns, case the In 43

restructuring CEPR POLICY INSIGHT No. 104 July 2020 22 indebtedness. excessive encourage projects), can which or construction exports to (often related creditors private to insurance provide when governments as blurry, become credits private and official between lines the some cases, in and over-indebtedness; in result can creditors among all of coordination lack More importantly, creditors. private from responses destabilising similar trigger can or country) debtor creditor the either in or economics politics in of achange aresult (for as example, expected were that credits extend to of areluctance part on their indications institutions), although multilateral the(including creditors official the with debt associated from not arise does behaviour speculative destabilising such hand, other the earlier. On described effects untoward the with rates, on exchange impacts have severe can out of acountry money their pull to creditors by private attempt the Even not when debt short-term, is of events. turn adverse an such about bring rationally even might pandemic current the as such ashock expectations, in change inexplicable an from result can sudden stops While acrisis. precipitate quickly can this and debt, this over roll to refuse markets financial which in suddenbe stops can There currency. hard aforeign in denominated when it so is especially and risk, aparticular over is rolled be to has debt which Moreover, short-term account. into taken be that must externalities macroeconomic significant present creditors private and debt sector earlier, private discussed we As of debt. kinds by different posed risks differential the recognise to needs framework debt new sustainability successful Any MITIGATING RISKS ASSOCIATED WITH PRIVATE CREDITORS beginning. the at alluded we which to restructuring, debt for sovereign framework international of an establishment of the part important an wouldbe status creditor preferred this Formalising Policy Insight. of this scope 47 officialandprivate in countries where linesbetween banks The creditors becomesespecially blurry are owned by processes are a toxic combination, and especially so in an era of super-low interest of super-low era interest an in so especially and combination, atoxic are processes political short-sighted with lenders interacting –short-sighted indebtedness excessive for atendency been has earlier, there economy. argued we global the and As regions whole on costs enormous sometimes and countries, afflicted the on costs enormous imposed have ago.They century a some half liberalisation market of financial era the eversince system financial global of the part aregular have been crises Debt future. in revenue government flows wouldaffect they if especially long-run sustainability, debt affect may and implications geo-political) (including political have may conversions Such options. conversion debt-to-equity includes it often as debt sustainability, to risks systemic fewer debt poses related project- Collateralised project-related. been debt has Much Chinese recent of the $17 owes China. for to example, billion Argentina, Turkey. and of The Government Africa South Brazil, Argentina, including countries, al $370at (Reinhart billion estimated credits outstanding with governments, country developing emerging to and creditor bilateral largest the also is China countries. developed other and Kingdom United the Germany, States, United of the governments holder of the bonds of sovereign world. the It in largest nation the is creditor largest the surely is China reserves, international in $3 trillion more than With concern. of some subject the been recently has China to of indebtedness increase The large governments. Independent government muchlike agencies private act creditors. alsocansometimes ., 2020). Nearly half of these debts are owed by governments of other developing of other G20 by governments owed ., 2020). are debts of these half Nearly 47

et et CEPR POLICY INSIGHT No. 104 July 2020 23 contingency. Some countries have issued GDP-linked bonds, GDP-linked issued have countries Some contingency. the world’ of the wouldtrigger ‘state on that the borrowers and creditors between agreement an securing is debt agreements state-contingent in challenge The key direction. right the in astep be (Shiller GDP-linked bonds as such debt contracts, state-contingent to Moving pandemic. this of course the in as dramatically, change can obligations those meet to ability country’s the though even fixed, are obligations acountry’s that debt is problemA key with STATE-CONTINGENT CONTRACTS DEBT do so. eventually might they if –even pandemic current the during problem the of resolve debt restructuring to unlikely are CACs provisions, these without have bonds still countries many But because terms. payment amend to issues bond various across majority aqualified allow which CACs, now include aggregated bonds sovereign all of half Nearly bondissuance. different problem across this address to innovation been has There debt restructuring. overall required prevent the can that of thing kind the precisely bargaining, intra-creditor to rise gives it also equity; of intra-creditor questions raises doing frequently so and of these of each restructuring a requires Adebt restructuring structures. maturity and terms covenants, separate with each bonds, however, of sovereign have multipleMost governments, series 25% of bondholders. of more than support the muster can they if standstill block aCAC-led still of bondholders can Aminority bondholders. on all binding terms new make and on payments, astandstill including bond, single bondholders of a of conditions and majority (75%)terms the for aqualified change to allow typically workouts. They debt restructuring improvement sovereign an in mark 2014). (Sassen, The CACs Vietnam Poland d’Ivoire, and Cote Peru, Ecuador, Panama, against but also case court well-known the in Argentina against not only behaviour funds’ vulture by exemplified – restructurings ‘holdouts’ to prevent such for difficult it more by making (CACs) debt restructuring clauses action facilitate Collective CLAUSES ACTION COLLECTIVE briefly three aspects which have received considerable attention in recent years. recent in considerable attention havereceived which aspects three briefly discuss we sub-sections, three next the In mechanism. debt restructuring sovereign rules-based and apredictable put place in and debt contracts better design to is duration, and depth their and debt crises, of future likelihood the reduce to way One earlier). noted as 9% get to interest, pre-judgment enable creditors which (for example, frameworks do legal as have faced, would otherwise creditors that losses the have reduced which courts, friendly have creditor too So practices. lending of bad costs have the lowered IMF) of the assistance the with past the in engineered (often bailouts country of lenders. Creditor part on the prudence greater encourage to than other indebtedness, no excessive simple such is There of way preventing rates. 49 Costa Rica,Bulgaria,andBosniaHerzegovina49 Costa inthe1980sand1990s;sincethen,Argentina, Greece, and Trusteeship ofreformsisnot meanttobeexhaustive. list inthedesignofcontracts 48 This provisionsmay alsoplay an in the GDP growth data reported by a debtor government, though the one instance one the instance though government, by adebtor reported data GDP the in growth confidence have full do not always But creditors of GDP rate on the contingent growth. payment whenGDPgrowthfellbelow thepredetermined rate. Nopre-determined level. sovereign withcreditors bondhasbeen issuedyet acceptingdownside riskoflowercoupon tonominalwages.indexed But intheseGDP-linked bonds,creditors onlyget the anupside whenGDPgrowthexceeds Ukraine issuedGDP-linked bonds.In 2014, Uruguay issueda$1billionbondwithprincipalandcouponpayments role. important et al et , 2018), where what the country has to pay is related to what it can pay, will pay, it can what will to related pay, 2018), is to has country the what where 49 making bond payments bond payments making 48

CEPR POLICY INSIGHT No. 104 July 2020 24 against collection efforts by creditors. There is no provision in thelaw liquidation in for is no There provision creditors. by efforts collection against revenues and assets of its protection automatic 9provides Chapter Not surprisingly, creditors. the private of claims over financial –should have priority among others pensioners, to commitments honouring and citizens the to services basic providing – of apublic obligations entity simple: The idea is social public the debt interest. in their restructure to to publicpowerand entities protection significant give procedures 9 Chapter the borrowers, for private designed procedures bankruptcy the Unlike paragraphs. the following in differences more salient somethe of different.discuss We significantly is 9bankruptcy Chapter procedures, debt – can guide us in the right direction. right the in us guide debt –can their restructure they while claims creditor against public other authorities and municipalities protect US the – which in procedures 9 bankruptcy The Chapter place. in amechanism such of not having costs high the expose further to likely is The pandemic sustainable. are believes IMF the that levels the beyond well are that payments demanding also are The creditors clauses. action collective the change to muscle financial their using are Worse, hoped. creditors the as working are not Argentina),contracts the debt new test big of first (that their –in of working some promise had and debtors and creditors both to acceptable was that clause action acollective –or least at debt contract optimal an design to of working years After one internationally? do so could that why should one expect domestically, market the leave it to one just If can’t frameworks. legal underlying even and expectations norms, different often are there because country, a within than more difficult far is borders across disputes Resolving agreement? atimely reach cannot debtor the and creditors when disputes resolving courts with framework, alegal adopted country every has why case, the were that if foolish: seemed always belief That contracts. designed better we had only if would not needed, be a mechanism such that hoped Many 2010). (Stiglitz, mechanism debt restructuring sovereign of arules-based absence the is architecture financial international global the in deficiency A fundamental SOVEREIGN BANKRUPTCY PROCEDURE countries. middle-income and low- from volume the be of debt servicing will higher the volume the higher of export, The countries. these from imports increase to countries for creditor incentive an create even might This countries. of low- middle-income and debt sustainability the wouldenhance bonds sovereign price-indexed or commodity export Issuing demand. by international determined are which prices, commodity on key contingent servicing debt make –may exports dependent on those commodity –especially countries developing Similarly, earnings. on export heavily depends which debt, that service to ability the to debt servicing (foreign index to exchange), sense dollars in it makes debt obligations With country. importing the from data through verifiable, easily and exogenous more perhaps more are GDP or inflation, unlike numbers, Export GDP increase. want debtor to and creditor both since compatible, incentive typically is of a debt contract a basis as GDP real using – policy government by affected it –i.e., is GDP manipulable is real While of inflation. extent on GDP, the data suppress real overly to high an it tried as reported one government the where was concern most the been has this which in 50 Thereisalarge literature on sovereign mechanisms,includingonthe underlyingeconomicsandthe debt restructuring applicability 9(e.g.,Stiglitz, 2010 oftheideasunderlyingChapter and thereferences cited therein). 50 Although similar to other bankruptcy bankruptcy other to similar Although CEPR POLICY INSIGHT No. 104 July 2020 25 problem’ is virtually non-existent in Chapter 9 bankruptcy procedures. 9bankruptcy Chapter in non-existent problem’ virtually is ‘holdout the As such, acceptable. than less offer therestructuring find that those including creditors, on all binding debtor’s is the plan met, are requirements certain if restructuring, debt to negotiate efforts faith good make to expected it is while And plans. debt restructuring competing not may propose creditors the creditors, of its 52 Interestingly, required thedebtorisnoteven tonegotiate in good faithwithcreditors ifsuchnegotiations are deemed bankruptcy process bankruptcy a initiate to flexibility considerable afforded is payments making in difficulty facing amunicipality Under 9procedures, pension. and Chapter of salaries payment including obligations, financial other its or meet citizens its to services provide meet to creditors, of its consent the without debt, new undertake can protection bankruptcy under The municipality 9bankruptcies. Chapter in limited quite are rights Creditor al (Buchheit et creditors by private attachments from assets countries’ debtor protect to lines along these calls have There been US the Constitution. in stipulated as US state of a sovereignty the it wouldundermine of astate, entity constituted a democratically of assets the liquidate to allowed are creditors private if stright-forward: is rationale The creditors. to proceeds of the distribution and municipality of the assets of the 51 The US Courts, “Chapter 9: Bankruptcy Basics” 9:Bankruptcy “Chapter US Courts, 51 The have we The measures for better. be the surely almost will that lending, excessive the tempersome of they If time. this no different be It will risks. underlying mitigate to manage governments as soon as market the to return creditors and Investors markets. do not kill measures such that shows past the from Lessons market. capital international the destroy will measures such that outcries often are There well. as governments those from governments, influence their on have sufficient creditors these where and, by some creditors measures some of these to resistance be may There impose. they costs the and debt crises of these likelihood the reduce to measures policy several have we proposed Policy Insight, this In occur. to likely are action, of international absence the in that, numerous debt crises the resolve prevent and to framework institutional existing the within can we do what now. must we should begin Meanwhile, But upon process the us. already is pandemic the and mechanism, debt restructuring asovereign establish to time take It will VI. Conclusion such over indebtedness occurs, that help promote timely and equitable restructurings. restructurings. equitable and help promote timely that occurs, oversuch indebtedness when and of over-indebtedness, likelihood the reduce might that ways debt in sovereign governing contracts standard the rewriting facilitate also could The framework should underlay aframework. such that of principles aset adopted Assembly General 2015, earlier, in noted we UN the As follow suit. will countries other initiative, the joining countries debtor and of creditor mass a critical is long there So as participate. to willing were countries creditor so as key long effective, become to governments of all participation and agreement –should universal not need 9provisions Chapter on modelled procedure bankruptcy –asovereign mechanism A debt restructuring pensioners. its to obligations and assets city’s the protecting while haircuts steep securing for bondholders, instance, to owed of Detroit city of the $18 debt that billion therestructuring guided procedures Its proven effective. 9has Chapter States, United negotiations. orifthedebtorreasonably thatimpracticable acreditor believes may attempt toobtain apreference throughthe https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-9-bankruptcy-basics ., 2013). ., 51 . While it is expected to obtain the agreement of the majority majority of the agreement the obtain to expected it is . While

52 Within the CEPR POLICY INSIGHT No. 104 July 2020 26 Buchheit, L.C., M. Gulati and I. Tirado (2013), I. Tirado and “ Gulati M. L.C., Buchheit, References debt sustainability. assessing job in do abetter lenders to encouraging behaviour, improve market fact in may proposed G20 (2020), Communiqué from the G20 Finance Ministers and Central Bank Bank Central and (2020),G20 Ministers Finance G20 the from Communiqué (2011), downturn economic an use C.A. aborrower Majeure? Can Encinas, “Clause (1990), Uzan M. and B. Eichengreen, 1933 “The an World as Conference Economic (2006), Service “Argentina’s Restructuring”, Debt Research Sovereign Congressional (2011), Dell’Ariccia G. and S. reduce to efficient way an “AreClaessens, buybacks Bulow, Rogoff J. K. and (1988), on Boondoggle”,Papers “The Brookings Buyback C.-T. P.,Bolton, Gulati, M. B. Buchheit ,P.-O. and U. L. Hsieh, Panizza Gourinchas, (2020), J. and Farrar Brown G. E., Berglöf, “ 53 The requisite53 The write-offs byprivate creditors hedge – mostly fundsandpensionmanaging trillionsofdollars–are midst of this pandemic. of this midst way, a timely done, be in the in can on what some ideas provides Policy Insight This comprehensive should debt restructurings. be there and shoulda debt standstill, be We should done. for be what There all. high know too be will debt crisis the avert to failure of collective The cost debt crisis. world the avoid must a devastating of growth, To adecade. put on world for atrajectory the half economy Depression back Great the of 1933 in prolonged severity London debt that of conference the the failure dismal the of consequences remember the must countries debtor and of creditor Governments country –again, aswehave emphasised, itisanegative-sumcountry game. future. therecognition Andastheprivateseeks topostpone oftheselosses,itimposeshuge sector onthedebtor costs Much willbe they recognised today ofthefightiswhether or, withaninadequate at sometimeinthe restructuring, manageable. Besides,aswehave already onecannotsqueezewater –thelosseswillbethere. fromastone explained, Governors Meeting, 15 April. Meeting, Governors Journal Law Estate Trust and Property, documents?”, loan Real estate real commercial its in clause majeure force invoke the event to related down-turn or economic Working Paper No. 90-149. Berkeley cooperation”, of California University international of failed instance RL32637. debt?”,sovereign VoxEU.org 2: 675-699. Activity Economic 30 January. of Cyprus, University European Restructurings Debt Sovereign Eurozone VoxEU.org countries for low- COVID-19 middle-income in and comprehensive debt standstill Weder (2020), Mauro di “ VoxEU.org 45(4): 731-776. , 21 April. , 7 April. , 7April. Necessity is the mother of invention: the is How implement to a Necessity , 5 March , 5March 53

Letter to governments of the G20 nations G20 of the governments to Letter ”, paper prepared for presentation at the the at for”, presentation prepared paper The Problem of Holdout Creditors in The in Problem of Holdout Creditors ”, ”, ”, ”, CEPR POLICY INSIGHT No. 104 July 2020 27 Project borrowers”, Project subprime Africa’s (2013), Rashid H. J.E. and “Sub-Saharan Stiglitz, The Stiglitz Report: Reforming the International Monetary and and Monetary J.E. (2010), International the Stiglitz, Reforming Report: Stiglitz The Shiller, R., J.D. R., J.Shiller, Joy M. and Ostry, Benford (2018), GDP-linked bonds: “Sovereign B.W.Setser, on Foreign Council (2020), Restructuring”, Debt of Argentina’s State “The (2014), S. Policy of Vultures”,Sassen, Foreign “A History Short Journal J.J. Journal costs”, (1991),Rotemberg, lower bargaining can debt buybacks “Sovereign Trebesch (2020), C. Horn and S. C., Kiel Lending”, Reinhart, “China’s Overseas Okonjo-Iweala, N. and B. Coulibaly (2020), Fight Coulibaly B. to N. and Relief Debt Okonjo-Iweala, Needs “Africa OECD (2020), How much OECD atstake?”, countries: is for poorest the “A standstill P. (2007), and Polan, M. C., Medeiros, Ramlogan “A Debt on Sovereign Primer Performance D.J. (2020), Excuses aForce that Majeure Marmins, Coronavirus “Is the IMF (2020),IMF Update Outlook World Economic Views”, IMF Institutional with (2016),IMF of Experience -Review Flows “Capital J.F.Hornbeck, the (2013), with Dealing Debt: Sovereign “Argentina’s Defaulted Hepburn, C., B. O’Callaghan, N. Stern, J.E. Stiglitz and D. Zenghelis (2020), D. and Zenghelis J.E. Stiglitz N. Stern, “Will O’Callaghan, B. C., Hepburn, (eds) J.E. Stiglitz and Ocampo (2016), M., J.A. Guzman, Too Too Little, Quest The Late: (2016), J.E. Stiglitz and M. fluctuations”, consumption and Guzman, “Pseudo-wealth help (2020), vulnerable can Mazarei A. and Hagan S. standstills “Debt A., Gelpern, Syndicate Financial Systems in the Wake of the Global Crisis Wake Global the in of the Systems Financial Rationale and design”, and VoxEU.org Rationale 24 June. Relations, of International Money and Finance for World the Institute Economy, April. Project Syndicate Project COVID-19, (COVID-19), Coronavirus the to May.Policy Response Working Swaps”, and IMF Paper, Buybacks March. March. Association, Bar American of aContract?”, Policy Paper, December. 6February. Service, Research ‘Holdouts’”, Congressional Oxford Review of Economic Policy change?” of Economic Review Oxford climate on progress retard or accelerate packages recovery COVID-19 fiscal York: Press. University Columbia Columbia at Dialogue Policy for Initiative Crises, Debt Sovereign Resolve to WorkingNBER Paper 22838. Economics, April. of International Institute Peterson COVID-19 the crisis”, manage governments , 25 June. , 9 April. , 9April. , 16 March. , 16 March. 10(3): 330-348 10(3): June 2020 , June , May. , , New York: The New Press. , Washington, DC. , Washington, , 3August. , New CEPR POLICY INSIGHT No. 104 July 2020 28 The Guardian J. (2005),Sundaram, context, 1998 “Malaysia’s September controls: Background, UNDESA – United Nations Department of Economic and Social Affairs (2020), Affairs Social and of Economic Nations Department – United UNDESA (2020)UnitedUNCTAD on Trade Development and Nations Conference (2020b), on Trade Development and NationsConference (2020a), –United UNCTAD “The the to Responding Nations(2020),United Solidarity: Global Responsibility, “Shared Zuckerbrod, A.D. (2017), A.D. Zuckerbrod, the Evaluating in Interest of Pre-Judgment “Consideration Yadav, Y. power”, of (2019), University of creditor myths and buybacks “Debt Xafa, M. (2014), M. Xafa, “ (2020), LLP &Garrison “Update: Force Under Majeure Wharton Weiss, Rifkind, Paul, impacts, comparisons, implications, lessons”, G-24 Discussion Paper. Discussion lessons”, G-24 implications, comparisons, impacts, en/pages/newsdetails.aspx?OriginalVersionID=2369 trade”, May 13 ( global in decline marked “COVID-19 triggers world’s of the behind”, March. left being population for two-thirds the programme it takes” Towards a “whatever DevelopingCovid-19 Countries: to Shock of COVID-19”, impacts March. socio-economic 9 June. 1June. of Litigation”, New YorkRisk Journal, Law Pennsylvania, Debt Restructuring (COVID-19) Coronavirus the Pandemic”, 16 March. World Economic Situation and Prospects (2020), “World faces worst food crisis for at least 50 years, UN warns”, warns”, (2020), UN 50 years, for least at crisis food “World worst faces Sovereign Debt Crisis Management: Lessons from the 2012 Greek 2012 the Greek from Lessons Management: Crisis Debt Sovereign ”, CIGI Paper No. June. 33, , update as of mid-2020, as June. , update ). ). https://unctad.org/ The The CEPR POLICY INSIGHT No. 104 July 2020 29 Hélène Ugo Presidents Vice Philippe President Rey President Honorary and Founder Panizza Board the of Chair Martin CEPR. of those not and authors the of those are report this in expressed opinions The publications. to its review prior give not do Centre Trustees the the of but policy, on views include may research CEPR society. civil from drawn perspectives as well as Foreign Affairs, Government of Bangladesh. of Ministry the at Affairs Economic Multilateral for General Director the as served he UN, the joining Before Affairs. Social and Economic of Department Rashid Hamid of Discontent Age for an Power, Profits: People, Capitalism is Progressive and book recent most His Bank. World the of economist chief and president vice senior a former and Institute Roosevelt the at Economist Chief is University, Columbia at Stiglitz E. Joseph AUTHORS THE ABOUT of network alarge such on draws it Because publications. of sales and Members Institutional its from comes funding core its and matters policy economic on stand institutional no takes It groups. interest private and public all of independent is CEPR 1983, in founded was it since charity A registered relevance’. policy with excellence ‘Research is principle guiding CEPR’s key of decision-makers. hands the into results policy-relevant the to get and research, world-class to promote twofold: is goal Centre’s The universities. European in mostly based economists research over 1,500 of (CEPR) anetwork is Research Policy Economic for Centre The RESEARCH POLICY ECONOMIC FOR CENTRE THE researchers, is Chief of Global Economic Monitoring at the United Nations Nations United the at Monitoring Economic Global of Chief is its . , a Nobel laureate in economics and University Professor Professor University and economics in laureate , aNobel output reflects a broad Maristella Botticini Botticini Maristella Mauro di Weder Beatrice Portes Richard Bean Charlie Sir spectrum

individual viewpoints