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Moratorium or debt cancellation?

4/24/2020

According to Eurodad, without a suspension of external debt payments, the debt-to-GDP ratio of the very low income countries will increase to 14 pp. So far, official supports have taken the form of a suspension of payments. Why not favor debt cancellation?  

TRANSCRIPT // Moratorium or debt cancellation? : April 2020

THREE QUESTIONS

 

François Doux: This global recession is naturally affecting emerging-market countries, particularly the poorest ones that have huge borrowing requirements.

François Faure, hello.

 

François Faure: Hello François.

 

François Doux: First question: For the poorest countries, how large are these financing requirements caused by the global recession?

 

François Faure: A study by a network of NGOs (Eurodad) calling for debts to be cancelled estimates this financing requirement at USD 94 bn. There are 45 countries in dire need of funding because of the pandemic. Financing requirements would push up their debt/GDP ratios by 14 percentage points, which is a lot for very-low-income countries.

 

François Doux: The G20 has now announced a debt moratorium for some countries. Is that a good thing?

 

François Faure: Yes, it’s a good thing. A moratorium can be applied very quickly, whereas cancelling debt requires negotiations. When you defer repayments, all those resources can very quickly be spent on healthcare, and as I said you don’t have to negotiate with creditors.

 

François Doux: My third and final question, François Faure: Why not just cancel all the debt?

 

François Faure: In the medium term, cancelling debt is better than a moratorium, because it improves countries’ solvency. However, it still has two potential short-term drawbacks. Firstly, cancelling debt inevitably requires negotiations.

If international, bilateral and multilateral creditors such as the World Bank or development banks were involved in debt negotiations, it could prevent them from granting new funding to countries.

The second drawback relates to the policies of rating agencies. If only debt owed to public-sector creditors – whether they be bilateral or multilateral – is cancelled, this is good news for those countries’ credit ratings if they need to raise debt in the markets.

However, if private-sector creditors are asked to put their hands in their pockets, to ensure equal treatment, then rating agencies could be forced to downgrade countries’ ratings, or even place some of them in default.

 

François Doux: So a very interesting topic that we’ll naturally be following in the months to come. François Faure, thank you very much.

See you again in a few weeks’ time for another edition of EcoTV, under lockdown or perhaps not.

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