Sovereign debt pressures: will we cope? G-24 Webinar on Emerging Issues on Sovereign Debt July 28, 2020 Jeromin Zettelmeyer Deputy Director, Strategy, Policy and Review Department International Monetary Fund* *Thanks to Dimitri Drakopoulos of the IMF’s Monetary and Capital Markets department for allowing me to use his charts and data, and to William Diao and Yuchen Zhang for research assistance. IMF IMF | 1
Out Outli line ne Debt flows to EMDE’s during this crisis: what has happened so far. 1. Debt flows to EMDE’s during this crisis: what may happen going forward. 2. 3. Implications for crisis management. Can the system cope? IMF IMF | 2
Lo Look oking ing ba back: k: be betw twee een n Mar March h an and J d Jun une, e, fi fina nanc ncing ing co cond nditions itions impr improved ed dr drama amatica ticall lly y for or most most EMs EMs Funding unding cost costs s bac back to mi k to mid-2019 2019 Recor ecord d de debt i bt iss ssuance uance le levels on a els on aver erage ge EM Sovereign Bond Yields EM USD Sovereign Issuance (Percent Index) (Cumulative since the beginning of the year) Sources: Bloomberg, Dealogic, JP Morgan, IMF | IMF 3
Eur Eurob obon ond d issu issue e bo booms oms in A in Apr pril il (I (IG), G), May May an and d Jun une e (HY) (HY) Eurobond Monthly Investment Grade Sovereign Issuance Eurobond monthly High Yield sovereign issuance (USD bn) (USD bn) 45 12 40 Hungary (BBB) 10 Indonesia (BBB) 35 Belarus (B) Mexico (BBB) Albania (B+) 30 8 Philippines (BBB) Egypt (B) Jordan (B+) 25 Peru (BBB+) 6 Honduras (BB-) Romania (BBB-) 20 Ghana (B) Saudi Arabia (A) Colombia (BBB-) Gabon (CCC+) Indonesia (BBB) 15 4 Brazil (BB-) Bahrain (B+) Ukraine (B) Mexico (BBB) Trinidad (BBB-) Qatar (AA-) 10 North Macedonia El Salvador (B-) Philippines (BBB) Colombia (BBB-) (BB) 2 Uruguay (BBB) Dominican Republic Turkey (B+) Romania (BBB-) Hungary (BBB) Guatemala (BB) Saudi Arabia (A) (BB-) 5 Indonesia (BBB) Chile (A+) Croatia (BB+) Serbia (BB) Ukraine (B) Romania (BBB-) UAE (AA) Poland (A-) Paraguay (BB+) Chile (A+) UAE (AA) Indonesia (BBB) Panama (BBB+) Paraguay (BB+) Poland (A-) 0 UAE (AA) UAE (AA) 0 Jan.20 Feb.20 Mar.20 Apr.20 May.20 Jun.20 Jul.20 Jan.20 Feb.20 Mar.20 Apr.20 May.20 Jun.20 Jul.20 Sources: Bloomberg, Dealogic, JP Morgan, IMF | IMF 4
Ho However er, , ca capita pital l fl flows ws ha have e no not t full fully y rec ecover ered ed, , an and d some so me co coun untr tries ies rema emain in cu cut t of off fr from de om debt bt mar market ets EPFR EM Debt Dedicated Fund Flows and Returns Number of countries with US$ (Cumulative YTD USD bn and percent) spreads above 750 basis points Local Currency fund flows Hard Currency fund flows 10 10 10 10 Hard currency returns (RHS) Local currency returns (RHS) 30 EMEs LICs 5 5 5 5 25 0 0 0 0 20 -5 -5 15 -5 -5 -10 -10 11 -15 -15 10 -10 -10 -20 -20 6 6 5 -15 -15 2 -25 -25 0 06/19 07/19 08/19 09/19 10/19 11/19 12/19 01/20 02/20 03/20 04/20 05/20 06/20 07/20 -20 -20 -30 -30 IMF | IMF 5
Lo Look oking ing for orwar ard: co d: cont ntinu inued ed ea easy sy co cond ndition itions — for or a a shrink sh rinking ing grou oup p of of cou count ntries ries th that t ret etain ain fi fisc scal al sp spac ace Debt flows will be the result of two opposing forces: (1) continued very easy conditions in advanced economies; (2) shrinking room for additional borrowing in EMDEs, as debt ceilings are reached. Three groups of EMDEs. 1. Solvent countries: benefit from relatively easy financing conditions and ample official safety nets (including IMF precautionary facilities). 2. Conditionally solvent countries: risk losing market access, but retain access to official borrowing (with standard conditionality). 3. Insolvent countries (unsustainable debts): no market access; access to official borrowing only conditional on a debt restructuring. As the pandemic crisis drags on, more countries will move from 1 to 2 and from 2 to 3. IMF | IMF 6
It will It will ge get t wor orse se This may or may not mean that debts become unsustainable. General Government Gross Debt Sensitivity Analysis for EME Projection, 2018 – 21 (Percent of GDP) Government Debt/GDP projection (Percentage point deviation from Emerging Market Economies baseline) Low-Income Developing Countries Oil Producers Second Outbreak in 2021 Advanced Economies (Shown on the right axis) Faster Recovery Starting in the Second Half of 2020 70 135 25 130 20 60 125 15 120 10 50 115 5 110 0 40 105 -5 30 100 -10 2018 2019 2020 2021 2019 2020 2021 2022 2023 2024 Source: World Economic Outlook update, June 24, 2020 IMF | IMF 7
Res estr truc uctu turin ring g un unsu sust stain ainable ble de debt bts: s: th the e st stan anda dard d (ca (case se by ca by case se) ) app pproa oach Country at risk of losing or has lost market access — asks for IMF support. 1. IMF determines if debt is sustainable; if not, required “envelope” of debt relief. 2. 3. IMF supported program conditional on a process being in place that restores debt sustainability. Typically requires: (1) a credible restructuring offer to private creditors under way; (2) an agreement in principle with (or credible and specific assurances from) official sector creditors. 4. Program typically catalyzes support from other IFIs, including World Bank; fresh money from bilaterals. Provides finance to (again) solvent country until market access is restored. IMF | IMF 8
Co Could uld th this is app pproa oach h ge get t over erwhe helmed lmed? The number of countries looking to multilateral agencies for support and running into legal disputes with creditors could make this the worst emerging-market debt crisis since the 1930s at least, said Kenneth Rogoff, chief economist of the IMF from 2001 to 2003 … “They can’t handle that —the New York and London courts can’t, the IMF can’t,” he said. “It is a case of too many patients coming to the hospital at once.” (WSJ, July 27 2020) No Not t so so sur sure . • So far, no systemic debt crisis (thanks to relatively easy global financial conditions). • Even if we get one: the debt restructuring/IMF “hospital” is run by (existing) country by country “wards”. Courts come in later, if at all. • Problem in the 1980s was not that the system was overwhelmed, but that the system confused solvency crises with liquidity crises. We have learned. IMF | IMF 9
This his do does es no not me t mean an th ther ere e is is no no pr prob oblem lem 1. Procrastinating debtor countries (ask for help too late). 2. Difficult private creditors/holdouts. • “Enhanced CACs” help, but not a panacea: ➢ Only around 50 percent of stock; ➢ First “tests” delivering mixed results. Creditor collusion in response to greater flexibility? ➢ Do not help coordination between bond holders and other claim holders (banks, commodity traders … no CACs); ➢ Presence of collateralized debt. 3. A new challenge: official creditor coordination (Paris Club vs. non Paris Club) IMF | IMF 10
Ov Over erco comin ming g th thes ese e pr prob oblems lems if if t thin hings gs ge gets ts ba bad • IMF assurances policies can help address some of the free riding/coordination problems across creditor classes (require assurances to achieve high participation). • Most creditor coordination failures can be solved by the debtor , given sufficient legal and political cover. • It is in the power of the official sector (e.g. G20, UN security council members) to provide such cover: ➢ “State of necessity” (Bolton, Buchheit et al) ➢ Domestic legislation (or in the case of the U.S., Presidential Executive Order) that curtails power of holdouts to enforce ➢ UN security council declaration that acts internationally with the same effect. • But doing so requires a common sense of purpose among the big countries. IMF | IMF 11
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