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Investors have rejected pleas from the G20 group of major economies to allow emerging economies to pause their debt payments, in an early indication of how difficult it will be for private creditors to collectively and voluntarily agree to coronavirus relief measures.
On Wednesday, the G20 urged private creditors to participate in its plan to provide temporary debt relief to low-income countries until the end of the year.
Zambia and Ecuador have already been forced to seek debt restructuring, and many more are expected to follow, given the magnitude of the economic and financial crises caused by the outbreak of the virus.
But while investors told the FT that flexibility was justified given the dire economic outlook for many emerging economies, they cautioned that a uniform voluntary agreement was not feasible in practice.
“There is no doubt that what these countries are going to need is cash flow relief,” said Robert Koenigsberger, chief investment officer at investment firm Gramercy Funds Management. “The question is what is the best way to do it.”
Investors must think of each country independently in terms of debt relief, according to Marcelo Assalin, head of the emerging market debt team at William Blair.
“A one-size-fits-all solution is not appropriate,” he said.
Mohamed El-Erian, Allianz’s chief economic adviser and Gramercy’s chief adviser, also argued against a “top-down” solution, advocating a country-specific approach.
“History suggests that the best approach is orderly and voluntary,” he said. “Ordered so that it does not delay economic and financial recovery, and voluntary, so that it gets a good acceptance and also that people continue to have aligned incentives.”
G20 countries agreed to freeze bilateral government loan repayments for low-income countries until the end of the year, and the Institute of International Finance, an industry club, also urged private creditors to agree to “voluntary” strikes if This is requested by some of the poorest countries most affected by the rapid spread of Covid-19.
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However, without some sort of legal mechanism to compel creditors to accept a stalemate, getting enough of them on board to support a debt moratorium would be a challenge, investors warned.
In previous debt restructurings, some bondholders refused to accept changes in their payments and took legal action. This could be a thorny issue to resolve, even if a large majority of investors agree on the need for debt relief, according to fund managers and analysts.
“Governments at this point have stronger priorities around managing the coronavirus outbreak,” Assalin said. “The last thing they want is to go to court with the bondholders and participate in a lengthy legal process.”
A possible solution offered by a group of financial and legal academics is for countries to channel debt payments to credit lines established by the World Bank or a regional development bank, which countries could take advantage of for essential expenses.
This would constitute a de facto deadlock, but technically it would not constitute a breach. Meanwhile, creditors would benefit from the legal protection enjoyed by organizations like the World Bank, and once the crisis is over, a decision could be made on whether a full debt restructuring was necessary.
“Any type of default would be extremely damaging and costly in the short term,” said Patrick Bolton, a professor of finance at Columbia Business School and one of the proponents of the proposal. “It is an easy way to align commercial creditors with the official sector. It is about buying a few months or a year.”
