Why Zambia’s debt deal is good news for struggling countries
Nearly three years after it defaulted on its bonds, Zambia late last week announced a debt restructuring deal with key creditors — including China.
The big picture: China has long been viewed as holding up a deal. Its willingness to play ball on debt relief signals a possible path forward for other countries in distress — like Ghana or Ethiopia — which owe large amounts to China.
Why it matters: Lengthy creditor standoffs delay any real chance of economic recovery for these countries and the millions of people who live there since the private sector lending community won't provide funds for a country in default.
- As U.S. Treasury Secretary Janet Yellen said, “During my trip to Zambia earlier this year, I saw firsthand how the weight of default and a stalled debt restructuring process can bring suffering to ordinary families and hold back economic growth.”
- The new debt deal “will provide relief to Zambian families and encourage the private investment that is needed to jump-start the economy,” she added.
Details: "Official sector" creditors (i.e. governments) that Zambia owes about $6 billion — the lion's share owed to China — agreed to an extension of debt maturities, and to a three-year grace period on interest payments, the FT reported.
“This could be a landmark deal ... and it may bode well for future agreements,” says Martin Mühleisen, a senior fellow at the Atlantic Council.
- But just how much of a playbook it is for other cases isn’t clear yet, he adds.
- That's in part because much of China's lending is intertwined with things like trade deals and resource extraction projects — which vary considerably between countries.
- "It depends on how the deal came together and whether it has some very specific Zambia elements, or whether it can be used as a blueprint for others," he says.
What's next: Zambia's private-sector creditors like mutual funds and banks now have to hammer out their own deal.
- The country's external bonds traded up several points last week thanks to renewed expectations for a resolution, says Reza Karim, investment manager for EM fixed income at Jupiter Asset Management.
And Zambia's progress even boosted Ethiopia and Ghana bonds, Karim adds.
- “The fact that [the deal] has been achieved suggests willingness” on the part of China to negotiate, which is a positive for other distressed sovereigns, he says.
The backstory: Why Zambia’s debt restructuring is a critical test for China