ON THE MORNING of November 13th last year Zambia’s vice-president told parliament, “This country will not default.” Hours later the inevitable happened. Having destroyed its relationship with the IMF, struggled to proe clear data on its borrowing from China and failed to win a reprieve from bondholders, Zambia missed a deadline to pay interest and defaulted on its debt. Lenders could only shake their heads in bemusement.
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For some poor countries like Zambia, a debt crisis has always been the story of a chaotic and corrupt government that has borrowed carelessly. But in the more complex creditor landscape of today, defaults can also, more than ever, be about struggling nations stuck in the web of diplomatic feuds that bind their creditors together. Each lender enters restructuring talks with the same preoccupation: is someone else getting a better deal? No one wants to be first to give concessions and there is little advantage in showing your hand. More than financial data or legal frameworks, it is these power struggles that have come to define restructuring negotiations.
The pandemic has left many countries struggling to repay their debt. As well as Zambia, five others—Argentina, Belize, Ecuador, Lebanon and Suriname—defaulted last year. For some, health-care and social spending rose just as the global economy tanked. In other cases, like Zambia’s, co-19 proed an excuse for a profligate government to default. Others could run out of money in the months ahead.
The last time a large number of poor economies were crumbling under the weight of government debt, around the turn of the millennium, the group of creditors was smaller. It included multilateral organisations like the IMF, a handful of commercial banks, and rich countries like Britain and America operating in unison as the “Paris Club”. An unusual mix of other players, including Bono, an Irish rock star, and Pat Robertson, an American televangelist, generated widespread support for debt forgiveness, but even then it was difficult. The resulting programmes—the Heavily Indebted Poor Country (HIPC) and Multilateral Debt Relief (MDRI) initiatives—have saved 37 of the world’s poorest countries over $100bn.
Drop the debt again?
Things are more complicated now. Poor nations have borrowed from new lenders. China and Saudi Arabia have lent a lot of money to developing-world governments. And as yields on rich-country debt have plummeted, poor governments have been able to sell foreign-currency bonds. The average portion of emerging-market public external debt owed to multilateral institutions dropped from 43% in 2008 to 34% in 2019, according to World Bank data crunched by Fitch Ratings, while the share for commercial lenders (largely bondholders rather than banks) jumped from 29% to 45%. Meanwhile, bilateral lending fell.
With the creditor landscape transformed, lenders are looking at recent negotiations, including those in Ecuador and Zambia, for signs of how future resolutions might take shape. Two new power struggles have emerged.
The first is between Chinese lenders and everyone else. The second is between Wall Street and Washington, where official-sector lenders like the IMF and the American government are based. For the 50 most-indebted recipients of Chinese lending, the average stock of debt owed to China reached 15% of GDP in 2017 from less than 1% in 2005, according to data from a group of experts including Carmen Reinhart, a Harvard academic now at the World Bank. Because of the political competition between Beijing and Washington, this lending is—often unjustifiably—framed as a devilish ploy to cripple poor economies and grab strategic assets. People think of China “in almost conspiracy-theory terms”, says Meg Rithmire of Harvard Business School. Governments in Zambia and Ecuador have been renegotiating their debt with one eye on elections this year. In a sign of just how contentious the issue is, the front-runners in the poll in Ecuador, which also owes a lot to China, are running on opposing economic plans: Andrés Arauz promises to scrap the existing deal with the IMF, whereas Guillermo Lasso wants to rebuild investors’ trust.
Beyond suspicion and rivalry, Chinese lending has specific characteristics that complicate talks. The first step in any restructuring is calculating how much a country owes and to whom. That is a thorny business when China is involved. What analysts refer to as “Chinese lenders” includes a variety of institutions, such as state-owned enterprises and policy banks, which act on behalf of the government. “They’re not all on the same team,” explains Deborah Brautigam of the China Africa Research Initiative at Johns Hopkins University.
Keeping track of all this lending is tricky, too. Much of it goes undeclared, and confidentiality clauses prevent governments from sharing the terms of their loans. That has been a stumbling block in Zambia. To offer support, the IMF needs information on loans from China that have been agreed upon but are yet to be handed out, meaning they do not show up in public accounts. Foreign bondholders, who have lent a total of $3bn, have refused to proe a reprieve for fear that their funds will be used to pay off Chinese lenders.
Everyone is seeking clues about the extent to which Chinese lenders will join co-ordinated debt negotiations. So far, they seem eager to look like they are engaging with other creditors. But they are changing their ways gradually, following the Chinese proverb and “crossing the river by feeling the stones”. Policy banks have deferred payments on loans to the Zambian and Ecuadorean governments, but details are patchy. Similarly, China joined the G20 in its Debt Service Suspension Initiative (DSSI) announced last year, to pause repayments on bilateral debt for 73 of the poorest nations, and in its “common framework”, which proes longer-term help. But it has curbed the power of the DSSI by treating some policy bank loans as commercial, so they are not part of the standstill.
As for the other main power struggle, it pits official lenders like the IMF and creditor governments, which have a long history of lending to the developing world, against commercial lenders that make money doing the same.
Here, too, trust is an issue. Abebe Selassie, director of the IMF’s African department, points out that one of the biggest recent scandals around undisclosed loans involved European banks, including Credit Suisse. Some $2bn of questionable debt that was taken on by state-owned enterprises in Mozambique in 2013 and 2014 eventually crippled the local economy and forced the government into default. “Transparency is about all lenders, not just China,” says Mr Selassie.
More worrying still is disagreement on the responsibility a fund manager sitting in London or Hong Kong has to a poor-country government. Private-sector lenders have come under pressure to offer concessions, even to solvent governments. Some bondholders, like Yerlan Syzdykov at Amundi, say they have a fiduciary duty to generate returns for clients and that it is not their job to “proe financial aid” to poor governments. “We’re not charities,” he says. Besides, renegotiating foreign-currency bonds might not be in the interest of poor economies if it leads to a credit downgrade, making it more expensive to raise money on international capital markets in future.
Egos involved
Bondholders nowadays are a disparate group. Some funds hold on to debt for a while; some are opportunists, buying bad debt when prices nose-dive. They all have different goals, which is why they have split into multiple committees in recent talks, including those in Argentina. The same fund managers pop up in all emerging-market debt restructurings, too. There are big personalities involved and personal feuds linger.
A government trying to restructure its debts needs not only to get all lenders onside but to do so in the right order. The Paris Club will negotiate only once a country has an IMF programme in place and demands debtor countries ask other lenders for concessions comparable to their own. That is why Iraq, with vast oil reserves and foreign troops on the ground, began negotiations with the rich-country group before other lenders, winning a 90% reduction (in present-value terms) of its Saddam-era debt stock that it could then ask other creditors to match. A country that lacks geopolitical clout is unlikely to get an easy ride from bilateral lenders and might follow a different strategy. “This is a major tactical question for a sovereign that has both Paris Club and commercial debt: what is the right sequence?” says Lee Buchheit, a lawyer who specialises in sovereign debt.
The key to breaking the deadlock between various creditors is often the IMF. Other lenders are more willing to give a government a break when they have data, an economic plan and the promise of supervision from the Fund. “What you generally want is an honest broker,” says Jan Dehn at Ashmore Group, an emerging-market investment manager. In the case of Argentina, the IMF struggled to play that role because it was one of the creditors seeking repayment.
As for Ecuador’s restructuring last year, which was wrapped up in a matter of months, it was crucial that the government had kept up good relations with the IMF. Its request to postpone $800m in coupon payments was conditional on thrashing out the beginnings of a new deal with the IMF. Over 90% of bondholders agreed to the pause and then to a restructuring when the time was up.
Ecuador, a serial defaulter, had some experience navigating its creditors. Not so with Zambia, which sold its first foreign-currency bond as recently as 2012. It wrecked its relationship with the IMF when it kicked the Fund’s previous representative out of the country in 2018. The only reason for optimism now is that Zambia’s new IMF representative flew to Lusaka in December, followed soon after by Mr Selassie, raising hopes that a new programme might break the deadlock.
The fact that the IMF team made the trip points to a final complication hanging over debt talks right now: travel bans. Those officials managed it, but it will be a while before all lenders can meet in person. Hans Humes, a big cheese at Greylock Capital, still cringes as he recalls the day his three-year-old daughter burst into the room during online negotiations over Argentina’s debt, keen to show her drawings to the bankers at Lazard and the Argentine minister for the economy, Martín Guzmán. Mr Humes hankers for the day he can get around a table with his counterparts in a more professional setting, where he can read their body language and sidle over to old allies for an uninterrupted chat. “There is no equivalent to taking a break and having a coffee,” he muses. ■
“Here we go again”
