The IMF has called for urgent action and ambitious reforms to prevent a much more pronounced debt crisis in some of the world’s poorest countries, underscoring its concerns that many emerging economies will struggle following the Covid-19 pandemic.
IMF managing director Kristalina Georgieva warned there was a risk of a spate of sovereign bankruptcies unless temporary debt relief measures put in place earlier this year are extended and sovereign debt contracts and processes are overhauled.
“No debt crisis has happened yet thanks to decisive policy actions by central banks, fiscal authorities, official bilateral creditors and international financial institutions in the early days of the pandemic,” she wrote in a blog post published on Thursday and co-authored by her colleagues Ceyla Pazarbasioglu and Rhoda Weeks-Brown. “These actions, while essential, are fast becoming insufficient.”
Ms Georgieva urged the G20 group of leading nations to extend its freeze on bilateral government loan repayments for low-income countries until 2021, and warned that a failure to do so could result in widespread economic pain.
The scheme, which has been criticised for failing to secure the involvement of private creditors, is set to expire at the end of the year.
Many countries have already been pushed to the brink by the economic impact of the coronavirus outbreak. Last week Zambia requested more time from its international creditors to meet its obligations. Rwanda has warned it is also struggling, while Lebanon has begun a restructuring process. Earlier this year Argentina and Ecuador struck deals with their bondholders.
Without fresh support the list of vulnerable countries is likely to grow, according to the IMF, which projects that debt ratios for emerging economies will rise by an average of 10 per cent of gross domestic product this year compared with their pre-pandemic levels.
“Many of these countries could suffer a second wave of economic distress, triggered by defaults, capital flight, and fiscal austerity,” Ms Georgieva said. “Preventing such a crisis can make the difference between a lost decade and a rapid recovery that puts countries on a sustainable growth trajectory.”
In a separate report also released on Thursday, IMF officials recommended sweeping reforms to ensure that countries in need of debt restructuring can resolve the situation quickly — avoiding Argentina’s situation after its 2001 default, when it became ensnared in a decade-long legal battle with creditors who held out for better terms.
The fund warned of “gaps” in the current system that may “pose challenges, particularly if sovereign debt distress were to reach systemic levels”.
The paper’s authors suggested a review of so-called “collective action clauses”, which dictate that if a large majority of bondholders vote for a restructuring — typically 75 per cent — the terms are imposed on all holders of the debt. The IMF argued for more widespread use of these clauses in international sovereign bonds and said that similar provisions should be used in other types of debt, including syndicated loans.
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They also argued for the addition of clauses that automatically trigger repayment standstills or reduced payouts in the event of natural catastrophes or major economic shocks, new protocols to increase transparency about countries’ borrowings, and the development of a more formalised and cohesive approach to restructuring official bilateral debts.
“The world is at a critical juncture and should not sit idle waiting for a crisis,” Ms Georgieva said. “It needs to review its arsenal of weapons . . . [and] do the utmost to prevent, and if necessary, pre-empt, another sovereign debt quagmire.”
“The alternative could be large-scale defaults that would severely damage economies and set back their recoveries for years,” she added.