From Angola to Jamaica to Ecuador to Zambia, the world’s poor countries have had their finances shredded by the global pandemic.
The president of Tanzania has called on “our rich brothers” to cancel his country’s debt. Belarus veered toward a default when a promised $600 million loan from Russia fell through. Russia couldn’t spare the money because the ruble had taken a nose-dive, along with oil and gas prices. Lebanon, troubled even before the pandemic, has embarked on its first debt restructuring. And Argentina has defaulted again — for the ninth time in its history.
The low interest rates of the past decade led to an unlikely alliance between poor countries and international investors. Governments, state-owned companies and other businesses were able to raise money relatively cheaply to finance their growth, while investors searching for better returns than they were getting at home gobbled up that debt. As a result, developing countries owe record amounts of money to investors, governments and others outside their borders: $2.1 trillion for countries ranked as “low income” and “lower-middle income” by the World Bank, including Afghanistan, Chad, Bolivia and Zimbabwe.
Now, the pandemic is fraying that alliance. Economic activity has ground to a halt, closing ports, shutting factories, canceling flights and emptying resorts. Governments are on the hook for billions of dollars in interest and principal repayments — payments suddenly made more expensive by volatility in the currency markets at the same time that their public health costs are skyrocketing. And their investors are not in a forgiving mood.
“This is really unlike anything we have seen,” said Mitu Gulati, a law professor at Duke University who studies the debts of countries, or sovereign debt. “The last time we had this many countries likely to go under at the same time was in the 1980s.” In Latin America, that period was known as La Década Perdida — The Lost Decade.
Resolving those debts took years of negotiations, austerity measures and stalled economic development. But the debt crisis brewing today could be even harder to sort out.
Poor countries have long been able to borrow from institutions like the World Bank and International Monetary Fund, or from the governments of their trading partners, like China. But in recent years their debt, usually in the form of bonds, became popular with private investment firms. The investment funds in turn placed it with client pension funds, family offices and exchange-traded funds. And those entities have their own interests and their own rules, which will complicate any effort to negotiate easier terms for the borrowers, such as stretched out payment schedules, lower interest rates or reduced principal.
The stakes are high: Argentina’s multiyear dispute with a group of hedge funds including Elliott Management is a reminder of what can happen when a country lapses on its debt payments to investors. Elliott Management, a New York hedge fund run by Paul Singer, and others bought Argentine bonds shortly before the country defaulted in 2001, and held out for full repayment — at one point even seizing an Argentine naval vessel — rather than settle through a debt restructuring. When the sides finally settled in 2016, Elliott received nearly 400 percent of its original investment, according to Argentine officials.
A group of 77 poor countries are scheduled to make interest and principal payments of $62 billion on their debts this year, according to calculations by Ugo Panizza, an economics professor at the Graduate Institute of International and Development Studies in Geneva, who published them in a joint research paper with six other economists and bankruptcy lawyers. A portion of that is due in June.
Private investors have bought up more debt than official lenders in Latin American, East Asian and emerging European countries. These countries tend to issue bonds in dollars or other hard currencies. Now, their own currencies have plummeted in value as investors around the world sought refuge in the dollar — Brazil’s is down more than 30 percent against the dollar this year.
That means it takes more of their own currency to buy every dollar they need to pay their debts. At the same time, they’re spending heavily on everything from hand-washing stations in places without tap water to airlifts of protective equipment for medical workers.
“The abruptness of this shock is much larger than the 2008 global financial crisis,” said Ramin Toloui, a former assistant Treasury secretary for international finance during the Obama administration.
The International Monetary Fund has already expanded two emergency loan programs, and more than 100 countries have applied. Some, like Jamaica and Uzbekistan, have begun drawing their loans, while others are still being reviewed. The programs will help in the short term, Mr. Toloui said, but much more financial assistance will be required to keep poor countries solvent during a global shock. The I.M.F. itself has estimated the borrower countries’ total current need, from all sources, at $2.5 trillion.
During La Década Perdida, the debt that was crushing Latin America mainly involved loans from groups of banks, which spent years restructuring the loans, while the I.M.F. pushed to reduce government waste and inefficiency and make the local economies more productive. The process required cooperation, and if a bank tried to hold out, it might get a stern call from a regulator to bring it back on board.
The mix of creditors is different today. There are institutions like the World Bank, individual governments that have lent money — often to finance trade — and private-sector investors. So far, the private investors are the only ones that have been reluctant to give the countries a break.
In late March, the leaders of the World Bank and the I.M.F. issued a joint statement calling on international creditors to grant the struggling countries relief. They suspended the payments owed this year from a group of 76 countries known as the International Development Association, plus Angola, which owes large payments to China. A few weeks later, the Group of 20, a forum for large-economy governments and central banks including the United States, Germany and China, issued a communiqué supporting a payment suspension. Thirty-six countries have already applied, G20 officials said Thursday.
Those organizations have called on bond funds and other private investors to join the suspension on comparable terms.
The response has been slow.
It took the Institute of International Finance, a trade group from around the globe, nearly four weeks to offer a proposal. The group’s members — banks, insurers, hedge funds and other financial entities — say debt forgiveness is complicated by their fiduciary duties to their clients.
On Thursday, the group said it would be up to each investor to decide whether to go along with a moratorium, and any skipped interest payments would be tacked on to the borrowers’ principal. In other words, the countries would come out of the moratorium with more debt than they went in with.
Christian Kopf, head of fixed income at Union Investment Group, a large German asset manager with funds that own emerging market debt, said the approach that official institutions like the World Bank and International Monetary Fund are taking won’t work for many investors. That’s because suspending payments on a bond results in a default.
“Contractually, under the prospectuses and circulars of the bonds fund that we offer, we are not allowed to own defaulted bonds,” he said.
Investors would be forced to sell their bonds, and credit rating firms would be required to downgrade the countries. “It would destroy for years to come the market access of those countries,” Mr. Kopf said.
In remarks to a United Nations group on Thursday, the president of the World Bank, David Malpass, did not directly address the predictions that a breather could cause mass selling and turn borrower countries into pariahs. “Much more is needed, including longer term debt service relief and, in many cases, permanent and significant debt reduction,” he said.
Mr. Malpass also said commercial creditors had to find a way to take part “and not exploit the debt relief of others.”
Mr. Gulati, the Duke law professor, said he wondered if any solution could be reached in time for borrowers to skip their June bond payments without being deemed to be in default.
Decisions by the I.M.F., World Bank and G20 to let the countries skip payments will certainly free up cash, he said. But that doesn’t mean the countries will put it toward the costs of the public health crisis. If the private investors don’t get on board, the money could move into their pockets instead.
“That relief,” he said, “can be used to pay the private creditors on time and in full.”