Sluggish debt restructuring for Ghana, Zambia prompts US, China exploration of new debt relief options to avoid wave of emerging-market defaults
The US and China are discussing new measures to prevent a wave of emerging market sovereign defaults, according to people familiar with the situation, one of the most significant attempts in years at economic cooperation between the rival superpowers.
The talks — including ways to preemptively extend loan periods before countries miss payments — are broadly aimed at both easing the $400 billion-plus annual debt service burden for poor countries and finding an alternative to the high borrowing rates those nations now face in the market.
In addition to extending repayment times, other ideas being discussed include increasing financing from the World Bank and other multilateral banks. A key point is to roll out those measures before countries default and enter formal restructuring talks with creditors.
Any resulting joint proposal on global sovereign debt issues between Washington and Beijing would likely need the support of the full Group of 20, as well as the International Monetary Fund and the World Bank — the trifecta that’s struggled to resolve global debt distress issues since the pandemic.
It would also eventually require broad buy-in from private creditors, who have captured a bigger share of emerging market sovereign lending and expect a bigger say at the negotiating table.
One goal of the talks, two of the people said, is to bring a proposal to G-20 leaders when they meet in Rio de Janeiro in November. Another person cautioned the talks are still in an early stage and it’s unclear if they’ll result in anything concrete. The people spoke on condition of anonymity to discuss private talks.
The Treasury Department declined to confirm the specifics of the discussions, saying in a statement that “we talk frequently with China about sovereign debt concerns. And we talk to many countries about how to make sure the international financial architecture is meeting low-income country financing needs.”
China’s Ministry of Finance and the Ministry of Foreign Affairs didn’t respond to requests for comment.
Debt Deadlock
A joint US-China approach would be a breakthrough as the two sides are the most powerful forces acting on many nations’ debt workouts: Washington dominates the global financial architecture through the Treasury Department’s influence at the IMF and World Bank, while Beijing essentially has veto power over many deals as the biggest creditor to developing countries.
The discussions come amid growing concerns over the slow progress of restructuring talks for countries like Zambia and Ghana, which are now engaged in a process known as the Common Framework, a program to restructure debts launched in 2020 by the G-20, World Bank and IMF.
The framework’s ambitions included bringing traditional lenders from the so-called Paris Club — mostly rich, Western creditor nations — around the table with emerging creditors, notably China and the private sector.
But that process has drawn criticism for moving forward at a dangerously sluggish pace, leaving defaulted countries suspended for years while dissuading others near bankruptcy from seeking help given the grinding process.
For example, Zambia defaulted in 2020 and has still not finalized an overhaul of its debts. It appeared to have reached an agreement for restructuring more than $3 billion of debt late last year, only to have it fall apart amid a standoff between Beijing and bondholders.
The talks between the US and China began before a meeting in California in November between Presidents Joe Biden and Xi Jinping and have continued into this year, according to one of the people.
Debt issues were discussed during US Treasury Undersecretary Jay Shambaugh’s visit to Beijing earlier this month.
Developing nations spent a record $443 billion on debt service payments in 2022, according to the World Bank, which has warned the situation risks tipping them into crisis and creating a “lost decade” of economic stagnation.
About a dozen developing nations are in default or have global bonds trading at levels that suggest the market is bracing for the country to miss payments, according to data compiled by Bloomberg.
International capital markets have started to reopen for some emerging-market borrowers, but at rates that are likely to only worsen budget burdens. Kenya, for instance, sold $1.5 billion of notes this month at a 10.375% coupon.
