Apr 19, 2024 - Economy

The debt restructuring quagmire for low-income countries

Data: JPMorgan; Chart: Axios Visuals

Ghana and Sri Lanka announced major setbacks this week in their yearslong efforts to restructure their national debts.

Why it matters: Debt restructurings are taking too long — and the international lending community, especially the global financiers who descended on Washington, D.C., this week for the International Monetary Fund and World Bank spring meetings, is under pressure to fix it.

Driving the news: Both countries saw proposed deals with private-sector bondholders fall through.

  • Ghana said on Monday that the IMF rejected its deal with bondholders, on the grounds it didn't reduce debt to sustainable levels, as the FT reported.
  • On Tuesday, the Sri Lankan government said it rejected a plan proposed by a group of bondholders, per Reuters.

Zoom out: Persistently higher interest rates, slow global growth, and even the strong dollar have combined to the point at which some 60% of low-income countries are in debt distress or at risk of it, per the World Bank in December.

State of play: The stalemates with Ghana and Sri Lanka are "an expression of the incredibly complicated landscape right now," Martin Mühleisen, a senior fellow at the Atlantic Council, tells Axios.

  • One complicating factor: Over the last decade, China has become a major lender to emerging market countries. It has been slow to agree to deals, customary among sovereign creditors, that adjust terms or delay repayments.
  • That, in turn, can hold up a country's access to crucial IMF funds — as appeared to happen to Zambia.

The latest: The IMF announced a new policy on Tuesday to address the recent "significant delays" in its ability to provide financing to countries enmeshed in debt restructuring talks.

  • In a nutshell: The policy change will allow the fund to provide new loans if a "credible" process of talks with official sector creditors is underway, rather than waiting for a deal agreement.

The bottom line: Even if the IMF starts lending into official-sector arrears, that doesn't even begin to address the issue seen in Ghana and Sri Lanka, where a deal with the private-sector bondholders is nowhere to be found.

  • For now, the industry's best hope for progress lies with the Global Sovereign Debt Roundtable, which kicked off last year as a collaborative series of problem-solving talks involving public and private creditors, multilateral development banks, and borrowing countries themselves.
  • IMF and World Bank leaders said this week that these talks are helping to build consensus on ways the process can be improved in the future.
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