Via Financial Times

The G20 group is planning to offer lower income countries a moratorium on bilateral government loan repayments as part of an “action plan” to tackle the coronavirus pandemic and stave off an emerging markets debt crisis, a senior G20 official said.

The initiative, due to be finalised at a finance ministers’ meeting this week, would see a freeze on sovereign debt repayments for six or nine months, or possibly through to 2021, in line with an appeal last month from the IMF and World Bank.

Wealthy nations and multilateral institutions would use the period of the moratorium to draw up “very clear criteria, country-by-country of what exactly is going to happen. Is it debt relief totally? Is it just a deferment, a rescheduling?” the official said.

“For debt relief to happen it would take time for it to be co-ordinated,” said the official, who did not want to be named because of the sensitivity of the discussions. “But what is immediately needed is to give these people space so they don’t need to worry about the cash flow and debt servicing going to other countries, and they can use that money for their immediate needs.”

Concerns have been mounting about the debt sustainability of many lower income countries that borrowed heavily in the years after the 2008 global financial crisis and now lack the resources to deal with the economic problems caused by the Covid-19 pandemic as they grapple with high debts, fiscal deficits, plummeting revenues and weakening currencies — as well as health crises.

Another official close to the negotiations said the initiative “has strong support”. “Negotiations are still ongoing, and some details remain, but we are confident a solution will be found,” the official said.

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The IMF and the World Bank called for debt relief for 76 of the world’s poorest nations that are eligible to receive the bank’s International Development Association funding. But other countries outside that criterion are also struggling with high debts and depleted resources. There are still discussions about who would be included.

Countries receiving bilateral development assistance are estimated to be due to make repayments of about $40bn to external creditors this year. The country-to-country loans are estimated to represent about $18bn.

The Institute of International Finance, an industry association, estimates that lower income nations will make repayments of a further $130bn on domestic debts. But the exact scale of the debt is not clear, given the opacity of some of the lending.

After the IMF and World Bank appealed for debt assistance for poorer nations, there were concerns that some sovereign lenders may be reluctant to suspend repayments if the money saved was diverted to paying other creditors rather than being used to tackle the coronavirus crisis.

Those concerns initially focused on China, the biggest bilateral lender to the IDA countries. Beijing has granted debt relief to creditor countries in the past, but has preferred to do so on a bespoke basis rather than as part of any co-ordinated effort.

China has so far appeared reluctant to change that approach. Its foreign ministry said last week it was willing to talk to low-income countries individually about their debt challenges, while noting that past repayment problems had been resolved bilaterally.

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That stance may have changed ahead of this week’s meetings.

The G20 official dismissed speculation that there were differences between G20 members, particularly China, saying that while there were “some details that we are working through, certainly there’s a very clear commitment, including China”.

“Within the G20 there’s a very clear recognition that a global co-ordinated approach is a must, not a choice,” the official said. “I have not seen the spirit I have seen in the last six to eight weeks between the G20 members — there’s a clear understanding the political angles to this are put in a freezer.”

Odile Renaud Basso, chair of the Paris Club, a group of 22 big creditor nations, said any decision should be taken by all creditors together and that China was “participating very constructively” with the G20 negotiations.

“There must be a level playing field so that all creditors agree to the same key parameters,” she said. “But with that in place there is always a need for bilateral discussions between each creditor and debtor nation, and China could work within that framework. They are very much involved and I think they will be part of an agreement.”

She said several creditor nations, including China, had pressed for the IMF, World Bank and other multilateral lenders to join others in freezing debt repayments.

The IIF, which represents about 450 firms in the global financial services industry, has also called on private creditors “to forbear payment default for the poorest and most vulnerable countries significantly affected by Covid-19 and related economic turbulence for a specified time period, without waiving the payment obligation”.

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Ms Renaud Basso said she was confident that a voluntary standstill by private creditors would be agreed.

The G20 official said governments would not pressure private investors to offer poorer nations relief, saying it could distort markets.

“We would welcome any voluntary action by the private holders, but getting into the private holders has a lot of complications and legal ramifications,” the official said. “You cannot force individual investors to waive their rights. That could distort the markets, and could have the negative consequences of liquidity problems. They would not lend if they see any sign that they can be forced to let go of their assets.”

The G20 nations are also discussing how to make further funding available to multilateral institutions, like the IMF, in the knowledge that the current funding will not be sufficient.

“What is available now deals with the immediate needs, there are steps being taken to look at what additional resources we need,” the G20 official said.

The official added that while previously the G20 members considered support to lower income nations as more humanitarian support, “this time it’s different”.

“There’s now a growing recognition among G20 . . . that it’s a survival game, you cannot fix your own house alone . . . this virus doesn’t know borders,” the official said. “So what may be seen as difference of opinions, still issues to negotiate, is not about whether we should or shouldn’t, it’s about what’s the right approach.”

Additional reporting by Christian Shepherd in Beijing and David Pilling in London