"China is damping Zambia\u2019s efforts to come out of default"

" China is damping Zambia\u2019s efforts to come out of default \r\n\r\nBeijing\u2019s standoff with global bond investors over $3 billion of Zambian debt is damping the African nation\u2019s efforts to come out of default, and challenging the effectiveness of the International Monetary Fund-backed blueprint on sovereign restructurings for poor countries.\r\n\r\nThe fund\u2019s executive board on Wednesday approved an $187 million disbursement to Zambia, after saying earlier this month that the government is making progress and good faith efforts toward reaching a deal with private creditors.\r\n\r\nBut talks with bondholders are far from resolved, which the IMF warned could hurt its economic recovery as it holds up a comprehensive restructuring.\r\n\r\nThe dispute stems from China\u2019s rejection last month of a proposed deal between Zambia and bondholders partly because of a misunderstanding about the scale of losses private lenders would take. The African country\u2019s overall restructuring is being pursued under a Group of 20 initiative known as the Common Framework, unveiled three years ago to help poorer countries overhaul loans with all creditors \u2014 sovereigns as well as bondholders and commercial lenders.\r\n\r\nThe episode highlights the difficulty multilateral institutions like the IMF and G-20 have faced in their attempts to incorporate China into the US-led global financial system, particularly given Beijing\u2019s role as the biggest single sovereign lender to developing nations, many of which are now saddled with record-high debt payments.\r\n\r\nAt the core of the dispute is the concept of \u201ccomparability of treatment\u201d \u2014 which aims to extract comparable terms of debt relief for all creditors. That requirement was included in the terms of the Common Framework, which is why China has been able to scuttle the deal with the group of bondholders, which includes Amundi (UK) Ltd., Farallon Capital Management and RBC BlueBay Asset Management.\r\n\r\nBeijing in late November balked at the group\u2019s deal that would see private creditors taking similar cuts to official sovereign creditors on the present value of their loans, but getting larger repayments sooner than the official lenders. In addition, there has been also disagreements around how to compare different extensions of payment schedules and losses between different creditors.\r\n\r\nTalks have stalled and no breakthrough is expected soon, according to people familiar with the situation.\r\n\r\n Economic Recovery \r\n\r\nChina\u2019s Export\u2013Import Bank, which represents the country on the official creditors committee, and Finance Ministry didn\u2019t respond to request for comment. A spokesman for the IMF said its \u201csupportive of debtors and creditors finding a solution and has continued to provide technical analysis to help inform the negotiation.\u201d\r\n\r\nMercedes Vera-Martin, the IMF\u2019s mission chief for Zambia, said in a briefing Wednesday about the restructuring delays that \u201cthe longer it takes, there will be a higher impact.\u201d\r\n\r\n\u201cIt could put at risk Zambia\u2019s economic recovery,\u201d she said.\r\n\r\nThe continued debt overhang and falling mining production in Africa\u2019s second-biggest copper producer has sunk its currency to record lows, driving inflation to a 20-month high of 12.9% last month.\r\n\r\nThe IMF is providing input on whether different proposals meet debt sustainability and program targets, but isn\u2019t involved in deciding what constitutes \u201ccomparable\u201d treatments, Vera-Martin said, adding that the fund hopes the engagement and momentum between the government and bondholders will continue.\r\n\r\nPart of the issue stems from a working paper prepared in June for Zambia\u2019s official creditor committee, led by China and France, that showed private bondholders could take cuts on the present value of their loans up to 10 percentage points bigger than sovereign lenders, according to the people, who asked not to be identified describing private conversations.\r\n\r\nAfter China\u2019s Exim Bank got approval from authorities in Beijing to agree to a deal based on those assumptions in June, the final proposal from bondholders that emerged last month had a much smaller cut, which Exim Bank rejected, according to the people.\r\n\r\nChina is also concerned that bondholders stand to profit under the proposal as the coupon on their bonds is higher than the interest rates on Chinese loans and that many bondholders bought the bonds at a low price, standing to benefit from a deal, according to one of the people.\r\n\r\nComplicating issues in the background is that two other large Chinese state lenders to Zambia \u2014 China Development Bank and Industrial and Commercial Bank of China \u2014 are both classified as commercial creditors rather than sovereigns, meaning the payments they ultimately receive will be impacted by the bondholder deal.\r\n\r\nBondholders last month proposed taking a 40% reduction in the present value of their loans, compared with 39% for the official creditors. One source involved in the negotiations said a 44% cut by all commercial creditors, including bondholders, would be more acceptable to most members of the official creditor committee.\r\n\r\nZambia\u2019s Ministry of Finance said in a response to questions that it\u2019s \u201chopeful that the government will reach a successful conclusion to the restructuring of its external commercial debt in early 2024,\u201d and is considering various measures to ensure it services commercial loans."

"China is damping Zambia\u2019s efforts to come out of default"

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