Illustration: Aïda Amer/Axios
Zambia is restructuring its debts, and causing a stare-down battle between China, on the one hand, and the IMF and World Bank, on the other.
Why it matters: Eventually, either China or the MDBs are going to have to blink. An important precedent will be set either way.
How it works: The history of sovereign debt restructuring is, in one sense, quite simple:
- Ruritania borrows money by issuing some kind of debt instrument.
- Ruritania discovers it can't pay its debts.
- Ruritania's creditors eventually realize the same thing, and agree to restructure their debt instrument so that they get something back.
- Ruritania's creditors conclude that they held the wrong kind of debt instrument, and need to hold something that can't get restructured.
- Ruritania, now with a smaller debt burden, returns to the market — but this time issues a new debt instrument that doesn't have a history of getting restructured.
- Goto line 2.
Where it stands: Like all the best stare-down battles, this one is taking place in the footnotes of G20 communiqués.
For the record: The latest communiqué, which came out this week, has 52 paragraphs, 9,700 words, and one footnote. (There's also a 1,186-page version "with annexes" but I am too scared to open it.)
- The footnote, in full: "Noting that one member has divergent views on debt issues in paragraph 33, and emphasized the importance of debt treatment by multilateral creditors like MDBs."
- To be clear: The "one member" in question is China.
The big picture: The MDBs, or multilateral development banks, have so-called preferred creditor status. Which means they always get paid back in full, partly because they lend at well below market rates.
- China, however, wants them to participate in "debt treatment" — which means it wants them to write down at least some of their debts.
By the numbers: Zambia owes China $5.9 billion, per former Treasury official Brad Setser's excellent summary of the situation. The MDBs are owed $2.7 billion. Total external debt is $20 billion.
- "I don’t think there is any 'give' in the MDBs," Setser emails Axios. "Their preferred status is not up for negotiation."
The bottom line: Zambia is a crucial test case for many other countries that are going to have to restructure their debt in coming years. (Looking at you, Ghana.)