• Sat. May 14th, 2022

Downgrade fears will deter countries from joining G20 debt relief framework – World Bank

ByTina R. Wimmer

Mar 11, 2021

By Karin Strohecker

LONDON, Feb 23 (Reuters) – Fears of a credit rating downgrade will deter the world’s poorest countries from taking advantage of debt relief on offer under the G20 joint framework, the chief economist said. of the World Bank, Carmen Reinhart.

In November, the G20 group of major economies launched a framework designed to streamline a process to help countries postpone or negotiate debt reduction as part of a broader relief package.

Ethiopia’s application in January for the program – which includes the participation of private creditors – prompted Fitch and S&P to cut its sovereign rating.

“Countries will weigh this in…especially countries that still hope to access private capital, tap into capital markets,” Reinhart said in an interview. “The prospect of being downgraded is going to be a deterrent.”

Still, the longer the effects of the pandemic last, the more countries will find themselves in debt distress and will have to seek relief anyway, she said.

Chad and Zambia have also requested debt relief under this framework. Ethiopian dollar-denominated bonds have been battered since the country requested relief through the framework, pushing yields from under 6% in January to over 9% on demand.

The framework – which comes on top of payment relief under the G20’s Debt Service Suspension Initiative (DSSI) – is open to more than 70 of the world’s poorest countries like Pakistan , Mongolia, Cameroon or Angola. Most of them are located in Africa or Asia, not all of them have outstanding international bonds.

Reinhart said she hoped countries that had applied for debt treatment under the framework would see a significant reduction, although many underestimated the complexity of the different types of creditors involved.

“A common recurring pattern is that there are efforts to reduce debt, but often there is not enough, often countries have to go back to the drawing board to try to solve the problems again,” said said Reinhart in the interview, part of IEFA. series of conversations.

“I hope the common framework will help achieve more meaningful debt reductions in the first round, but it will be a challenge.”

Meanwhile, a new allocation of Special Drawing Rights (SDRs) – the International Monetary Fund’s own currency – could help governments under pressure shore up their finances and help fund health and education systems hit hard by the crisis. pandemic, Reinhart said.

According to sources, the United States, Germany and Italy are all willing to back a new $500 billion SDR issuance.

“Bigger pie provides the extra firepower that is so lacking in many of these countries,” Reinhart said, adding that she expects it to happen quickly.

“It’s a very important step in the right direction.” (Reporting by Karin Strohecker Editing by Alexandra Hudson)