Nov 19, 2022 - Economy & Business

Zambia's debt restructuring precedent

Illustration of a hundred dollar being built by construction vehicles. 

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:

  1. Ruritania borrows money by issuing some kind of debt instrument.
  2. Ruritania discovers it can't pay its debts.
  3. Ruritania's creditors eventually realize the same thing, and agree to restructure their debt instrument so that they get something back.
  4. Ruritania's creditors conclude that they held the wrong kind of debt instrument, and need to hold something that can't get restructured.
  5. 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.
  6. 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.)

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