Apr 23, 2020 - Economy

Two big ideas for the sovereign money crunch

Data: Knomad; Chart: Axios Visuals
Data: Knomad; Chart: Axios Visuals

Bankruptcy is not an option for sovereign borrowers. That's not a big problem for countries like the U.S. that can borrow unlimited amounts in their own currency.

Yes, but: It's a huge problem for most countries that need to fund their coronavirus response while also servicing existing debts. For those countries, one solution is the creation of new obligations issued at a super-sovereign level.

Two big ideas along those lines are the proposals that the IMF should issue $500 billion in new Special Drawing Rights and that the EU should issue perpetual bonds (subscription).

Poor countries should also be able to push back their payments to private-sector bondholders for 12 months. A new proposal from a group of authors, including sovereign debt guru Lee Buchheit, suggests a clever way for them to do that.

  • Countries would instead send the payments to the World Bank, which would use them to fund a new credit facility.
  • That facility would then immediately lend the money back to the sovereign, to be used to fight COVID-19.

Here's why it makes sense for countries to send payments to the World Bank, just for those monies to come straight back again.

  • The Bank can certify that the funds will be used to fight the virus.
  • After a year, the countries would repay the Bank, with interest. (Thanks to its preferred creditor status, it nearly always gets repaid.) The Bank, in turn, would pass the money on to bondholders.
  • The bondholders would have very little incentive to sue for their missed coupon payments, because it would be cheaper and easier to just wait a year to get their money from the Bank. (If countries are sued, there's a "doctrine of necessity" they will be able to use to defend themselves.)

By the numbers: According to the World Bank, remittances to poor countries — the most important way they get money from abroad — are expected to fall by an unprecedented $109 billion this year. That also happens to be roughly the amount of money those countries need to spend on servicing foreign bonds.

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