[ad_1]
While the coronavirus pandemic added to Zambia’s troubles, its debt troubles began years earlier. (Photo by Per-Anders Pettersson / Getty Images)
- Zambia is preparing for a painful encounter with foreign bondholders.
- The country says it cannot pay interest on one of its Eurobonds.
- This makes it Africa’s first sovereign default since the coronavirus pandemic struck.
Zambia is preparing for a painful encounter with foreign bondholders after saying it cannot pay interest on one of its Eurobonds, making it Africa’s first sovereign default since the coronavirus pandemic struck.
The refusal of bond investors on Friday to provide debt relief to the government sets the tone for tough restructuring negotiations with a wide range of creditors, from pension funds in Europe to Chinese state banks to which Zambia owes nearly 12,000. millions of dollars.
“A default could make an orderly and timely restructuring more challenging,” said Samir Gadio, head of Africa strategy at Standard Chartered Bank Plc in London. “A prolonged default can cause some investors to undo defaulted bonds,” causing prices that are already below half their face value to drop, “he said.
Holders of Zambian Eurobonds worth $ 3 billion rejected a request to suspend interest payments for six months, prompting the southern African nation to say it did not have the money to pay $ 42.5 million. dollars of interest due.
Failure to comply will give the holders of the three securities the right to demand immediate repayment. While they are unlikely to go down that path, Zambia could find itself excluded from international capital markets for years as it struggles to reduce its debt burden and address fiscal challenges.
“I would expect the debt restructuring talks for Eurobonds to be very difficult and prolonged,” said Phillip Blackwood, an adviser to Sydbank, which has Eurobonds from Zambia.
Equal treatment
Zambia submitted its request for an interest freeze as part of the so-called Group of 20 Debt Service Suspension Initiative, an agreement between rich nations to suspend interest payments owed to them by poor countries. The government said it was asking all its foreign creditors, including private lenders, for the same relief.
Last month, the China Development Bank agreed to defer interest payments. While that covered a small portion of the debt, it created a precedent that made it difficult for bondholders to pay.
“Given our precarious fiscal situation that forces us to treat all creditors pari-passu, Zambia would regrettably have no alternative but to accumulate arrears,” Finance Minister Bwalya Ng’andu said in a text message. “The government is firmly committed to maintaining a very transparent and constructive dialogue with all its creditors.”
Unprecedented
However, bondholders were concerned that any relief they granted would be used to pay off debts owed to Chinese lenders, which account for more than a quarter of Zambia’s external liabilities.
Other governments should not see Zambia as an example of how to tackle debt restructuring, said Simon Quijano-Evans, an economist at Gemcorp Capital in London.
“Zambia cannot be used as a comparison with other countries, simply because it did not approach the IMF for several years and it was not transparent,” he said. “Other countries like Angola and Ghana did the exact opposite and are therefore in a much better position than Zambia.”
While the coronavirus pandemic added to Zambia’s troubles, its debt troubles began years earlier. The government has been heavily in debt since 2012 and ignored IMF warnings about the growing risk of debt distress.
Some Eurobond investors, including Blackwood, argue that Zambia’s debt problems only emerged in the years after it turned to international markets and turned to China for funds. The nation sold its first dollar bond in 2012 and its last in 2015.
“From the side of Eurobond holders, this is not about an unwillingness or any other way to forgive the debt,” he said. “It is clear to Eurobond holders that debt problems intensified when bilateral lending accelerated, after Eurobonds were issued. The nature of those deals quickly caused problems for the country.”
