Pivotal test for World Bank bond guarantees
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When a country can't access bond markets on its own, the World Bank has twice stepped in with a partial guarantee — which in both cases turned out to be worth less than the original bond buyers had bargained for.
Why it matters: That form of financial engineering tempted bond investors into thinking private-sector bonds might have the same seniority (so-called "preferred creditor status") afforded to World Bank debts.
- In the first case, investors' hopes were dashed. The same thing looks possible in the second case, too.
How it works: If a country with such a bond misses a debt payment, then the guarantee kicks in; the World Bank makes the coupon payment to the bondholders, and the country owes the Bank instead.
- Because the Bank is a preferred creditor, the country won't default on that obligation. And as soon as the Bank is repaid, the guarantee is reinstated, meaning that the next payment is covered, too.
The catch: The first time the Bank attempted this structure, with an Argentina bond issued in 1999, the cleverness evaporated on its first exposure to reality. Once Argentina inevitably defaulted in 2001, instead of demanding immediate repayment as bondholders had hoped, the Bank decreed Argentina could repay the money slowly between 2005 and 2009.
- Something similar is happening now in Ghana. The nation is on the brink of default — which would manifest as a debt exchange where old bonds would be swapped for less attractive new ones.
- The World Bank, seeking to help Ghana as much as possible, has no particular reason to increase that nation's total debt burden by maximizing the amount it has to pay out on the 2030 bonds.
- As sovereign debt nerds Mark Weidemaier, Ugo Panizza and Mitu Gulati explain in the FT, holders of Ghana's 2030 bond — the one partially guaranteed by the Bank — could easily be caught up in the restructuring before the Bank makes even a single guarantee payment.
The bottom line: The partially guaranteed bond is still trading at a substantial premium to Ghana's other bonds. As FT's Robin Wigglesworth writes, if bondholders get minimal benefit from a World Bank guarantee for the second consecutive time, that structure seems to belong solidly in the "tried and failed" category.
Go deeper: If you want to explore the details of what happened to the Argentina bond, and if you can get past the Euromoney paywall, I covered it in detail back in 2002.
