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G20 to consider an extension to debt forgiveness

  • The G20 agreed at the weekend to consider an extension of the Debt Service Suspension Initiative (DSSI)

  • We think extension could take two forms: a longer debt service suspension period and/or widening the scope of countries

  • Decision to be made around the time of the IMF/WB Annual Meetings in October

G20 to consider an extension to debt forgiveness
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
20 July 2020
Published byTellimer Research

The G20 agreed at the weekend to consider an extension of the Debt Service Suspension Initiative (DSSI), at its virtual Finance Ministers and Central Bank governors meeting, although it didn't say what form such an extension would take. (See here for the full G20 communique and here for a statement from the IMF Managing Director)

The G20's announcement is an official acknowledgement of what some market participants may have been expecting (even feared) all along. We think it is consistent with the recent mood music from the official sector side, and so may not be too much of a surprise, although it could continue to affect investor appetite for, and borrowing costs and sovereign ratings of, certain eligible, and other, countries (see our update DSSI: Where do we stand?).

Recall the DSSI, which was agreed in April, provides temporary debt service relief on official bilateral debt for certain eligible poor countries that request it, while private creditors are encouraged voluntarily to participate on a comparable basis. The DSSI suspends debt service due from 1 May-31 December 2020. 73 essentially low income countries are eligible.

The G20 communique welcome the progress so far. It noted that, as of 18 July 2020, 42 countries had requested to benefit from the DSSI, and US$5.3bn of debt service payments have been deferred. We note that the Paris Club has approved requests to suspend bilateral debt service for 18 countries so far, according to Paris Club data.

We think an extension could take two forms: (1) a longer debt service suspension period, ie covering debt service that falls due beyond the current end date of 31 December 2020, until some time in 2021, or perhaps beyond. We note the Paris Club has referred to a possible extension of the suspension period in its press releases announcing its approvals for some time. And/or (2) widening the scope of countries that are eligible for DSSI, ie beyond the 73 countries that are currently eligible (which are a combination of IDA-eligible and low-income countries). While we acknowledge it is not clear if the G20 intends to widen the scope, so there might not be anything here to concern investors (and even if the number of countries is increased, it might not include those with bonds or other commercial debt), we do note that the IMF MD statement seems to add another dimension to the scope of coverage when it says "we need to unite to help the poorest and most vulnerable economies, especially [our emphasis] those struggling with high debt or dependent on hard-hit sectors". Extending the scope might raise more uncertainty for investors over who else might potentially be included, a concern over mission creep that some investors held at the onset of this initiative.

In terms of private sector participation, the G20 note the IIF's Terms of Reference for Voluntary Private Sector Participation. However, both the G20 and IMF MD statement seem to lament the lack of private sector participation so far, something we have noted before, although this is up to the borrowing countries to decide and it is clear that some, for whatever reason, have been unwilling to pursue this. The G20 noted "the need for further progress and strongly encourage private creditors to participate" while the IMF statement said "greater private sector participation...should be strongly promoted". As we have noted before, we wonder if by the time of the IMF/WB Annual Meetings in October, the situation remains unchanged, whether the official sector may take a more forceful approach to ensuring private sector participation (see here).

The G20 also notes that "all official bilateral creditors should implement this initiative fully and in a transparent manner". Is this aimed at China?

The IMF statement also said "Beyond the DSSI, there is a need to fill gaps in the international debt architecture and think about more comprehensive debt relief for many countries." The last bit is interesting. Who do they mean? It is clear that DSSI provides temporary debt service relief and responds to a liquidity problem, but is not appropriate for countries that might now have a solvency problem.

As for timing, the G20 stated that consideration of an extension of DSSI will be made in the second-half of 2020, we think likely at the time of the IMF/WB annual meetings in October when the two institutions are due to present a joint report on the liquidity needs of eligible countries.

Still, the recovery in risk appetite means that market access has returned for many high-yield (even poorer) countries, which may obviate the need for some of those that are eligible to seek DSSI (see here), although this could complicate the discussion with the official sector come October.