Macro Analysis /

G20 endorses debt service suspension initiative for poorest countries

  • Key features of the agreement are outlined in a term sheet, which gives more operational details

  • All official bilateral creditors will participate

  • As we previously flagged, private creditors will be called upon to participate on comparable terms

G20 endorses debt service suspension initiative for poorest countries
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
16 April 2020
Published byTellimer Research

The G20 communique issued yesterday during the virtual IMF/WB Spring meetings confirms that it supports the international call for official bilateral creditors to provide a time-bound payment standstill for some of the world's poorest countries that request forbearance. The key features of the G20 agreement are outlined in a term sheet, which finally puts flesh on the initial IMF/WB proposal made on 25 March. It confirms a few things that we already knew or were previously unclear and contains a few things that we didn't know before, some of which may even be surprising. 

It will be interesting to see which countries choose to seek a debt suspension first, and how many overall do, especially among those with outstanding bonds, and how long the process might take. Yet, the market may have concerns that this debt relief initiative, and others like it, may be expanded to capture a wider set of countries, which could impact EM and frontier market borrowing costs and market access more generally. It may already be casting a shadow of default across most SSA bonds. Conversely, debt relief champions may worry that this initiative doesn't go far enough.

The key parts of the G20 agreement are:

  • It is potentially a wider set of countries than initially framed. The G20 says eligible countries are all IDA countries (we assume this includes IDA blend, so 76 in all), which we knew, and all LDC's as defined by the UN (47), which is new. There is a lot of overlap between these two groups. Crucially, for bondholders, we think Angola may also now be included (it is not an IDA country so wasn't in the initial group but is on the UN list of LDCs). Countries also need to be current on their debt service to the IMF and World Bank. 
  • Access is limited to countries that have i) made a formal request for forbearance and ii) have, or have requested, IMF financing. 
  • Beneficiary countries also have to commit to using the fiscal space created to increase health, social or economic spending, and spending plans will be monitored. They also have to disclose all public sector debt, although respecting confidentially agreements. This will be welcomed by public and private sector champions of debt transparency initiatives. This could be a big deal though for some borrowers and some bilateral creditors – and as we warned before, debt reconciliation could take time. Beneficiaries also agree not to contract new non-concessional debt during the suspension period. 
  • Time limited suspension, commencing 1 May 2020 until 31 December 2020. Creditors will consider an extension depending on an assessment by the IMF/WB. 
  • Principal repayments and interest payments will be suspended.
  • Cut-off date set on 24 March 2020 to protect new financing from a possible future restructuring.
  • The suspension of payments will be NPV-neutral. The repayment period will be 3 years, with a one-year grace period (4 years total). Does the mathematics of this suggest official bilateral creditors will charge delay interest and charges on deferred principal, which may not have been the intention from its proponents? 
  • All official bilateral creditors will participate (which therefore implies China has agreed to participate, at least in principle, although we don't know if it has attached its own conditions)
  • Multilateral development banks will be asked to explore their participation.
  • Private creditors will be called upon publicly to participate in the initiative on comparable terms. This confirms bailing in, as we had previously flagged it might, although it is not clear how this is expected to work; is there a presumption that it is automatic for any country that has requested forbearance or is this at the government's discretion? Requests for relief from private sector creditors should also be consistent with following best practice. However, what comparability means, given the NPV-neutrality requirement mentioned above, may provide some reassurance to bondholders if it keeps losses to an acceptable minimum (although the official sector's discount rate will be lower than the private sector's). However investors may fear they will be required to do more.