G20 agrees to extend DSSI, with bilaterals facing more scrutiny

  • G20 has confirmed a six-month extension to the debt service suspension initiative (DSSI)
  • Calls for all bilaterals to implement DSSI fully and transparently, while private participation is still voluntary
  • G20 and Paris Club also agreed on developing a common framework for bilateral creditors in debt resolution
G20 agrees to extend DSSI, with bilaterals facing more scrutiny

The G20 confirmed on Wednesday a six-month extension to the debt service suspension initiative (DSSI) – see G20 communique here. An extension was expected after the G20 agreed in July to consider it (see here), although the six-month extension (1 January-30 June 2021) is shorter than some may have wished (for instance, the IMF noted its preference for a 12-month extension – see here). Still, the G20 agreed to consider a further six-month extension if need be at the time of the 2021 IMF/World Bank Spring Meetings.

Bilateral focus

The G20 statement also warned that "all official bilateral creditors should implement this initiative fully and in a transparent manner", a point underlined by the Paris Club (see its statement here). And, to stress the point, the G20's addendum to the term sheet (Annex II of the communique) states that "beneficiary countries must request the DSSI from all their official bilateral creditors and not only a subset of them".

We think this reflects a number of concerns that have emerged over the implementation of DSSI, and chimes with concerns that we've heard during the virtual IMF/WB Annual Meetings this week, that some eligible countries have had difficulties with getting approvals from non-Paris Club G20 creditors and that the process has been too slow. Some (non-Paris Club) lending countries have proceeded on a bilateral basis, offered different terms, or have carved out certain lending entities from having to take part (so reducing the potential upfront cashflow benefit). Indeed, the IMF Managing Director Kristalina Georgieva pointedly noted in her opening press conference to the 2020 Annual Meetings on Wednesday in a reference to China that some of its lenders had participated in DSSI, while others have not because of the way they are classified.

Some of these concerns over non-Paris Club creditors could reflect weaker internal communication and coordination procedures within the lending countries, and across their lending entities, as well as their relative newness in having to deal with debt problems on a coordinated and multilateral basis, and could improve in time as lenders understand better international norms and learn the process.

We note that, to date, the Paris Club has approved 34 countries for DSSI.

Private sector participation disappointing but still voluntary

The G20 also noted its disappointment about the lack of private sector participation, a point echoed in the Paris Club statement and one that has been made before, although commercial creditors may breathe a sigh of relief that participation hasn't been made mandatory or that DSSI 2.0 isn't made contingent on private sector participation. The Paris Club reiterated the call for private creditors to participate in the initiative on comparable terms at the request of the borrower, but in essence participation is still voluntary; and the reasons for this perceived lack of participation are well-rehearsed (see here).

Interestingly, the IMF MD Kristalina Georgieva also noted in her opening press conference to the 2020 Annual Meetings on Wednesday that only three countries out of the 44 that have subscribed to DSSI have reached out to private creditors. We presume Zambia is one of them. We're not sure who the other two are and, whether or not they concerned bonds or loans (we recall that Grenada retracted its request; one might be Angola and its oil-backed loans).

Amendments to the term sheet

The G20's addendum to the term sheet (Annex II of the communique) also seeks to clarify and address another concern we've heard during the virtual Annual Meetings, namely that some eligible counties may have continued to service their bilateral debt during the suspension period, needlessly as it happens, up until the point their request was accepted. Countries may look for reimbursement.

The addendum also states that repayment terms will be extended, with a repayment period of five years, with a one-year grace period (six years in total). This is a two-year extension compared with the April term sheet (four years in total, repayment over three years, with one-year grace). However, it is not clear to us whether this applies only to newly suspended debt during the extended debt service suspension period or will be applied to debt already suspended.

A common framework for dealing with bilateral debt

Reflecting we think some of the operational concerns mentioned above, the G20 and Paris Club have also agreed – in the words of the IMF managing director – on the need to bring together all bilateral creditors around the same principles and the same approach in a common framework to dealing with debt. As such, the G20 and Paris Club agreed in principle on a “Common Framework for Debt Treatments beyond the DSSI”. This recognises that future debt treatments beyond the DSSI may be required on a case-by-case basis. Agreement on the Common Framework is subject to endorsement by G20 members and their domestic approval, with more details expected ahead of the Riyadh G20 Leaders’ Summit in November.

This is long overdue. We think such a multilateral approach to dealing with bilateral debt has been inevitable given the shifts in external financing over the past decade, with the emergence of non-traditional creditors (such as China), and that the international financial architecture simply hadn't caught up. The Paris Club still has much to offer given its experience and knowledge in this area.

And finally...

The G20 also welcomed the OECD's proposal to host the data repository and looked forward to progress on the IIF's Voluntary Principles for Debt Transparency.

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