Let me start by thanking Adam Posen and his team at the Peterson Institute for International Economics for putting together a great event.
This event could not be timelier. We are two weeks away from the IMF-World Bank Annual Meetings, where addressing growing debt vulnerabilities will be on top of everyone’s minds.
The IMF has been doing a lot of thinking on this issue, and today released a paper on the architecture for restructuring privately held debt claims. Before you hear about it in the next session, let me step back and share some thoughts on how we view the current debt challenges, and how these could be addressed.
Debt is not a new problem. Four years ago, our Fiscal Monitor calculated that total nonfinancial debt amounted to US$ 152 trillion, or 225 percent of world GDP; public debt had increased by 15 percentage points of GDP between 2000 and 2015.
As the pandemic raged throughout the world, debt turned out to be a very serious pre-existing condition.
All countries face the same crushing combination: higher spending to fight the disease and protect people; and lower revenue because of the recession triggered by all necessary containment measures.
Compared to pre-pandemic expectations, median debt in 2021 is projected to be up by about 17 percent of GDP in advanced economies; 12 percent in emerging economies; and 8 percent in low-income-countries.
It’s an alarming rise. With fewer resources and less capacity, Low-Income Countries are particularly vulnerable: about half of them were already in, or at high risk of, debt distress prior to the crisis onslaught.
So far, the world has managed to avoid a systemic debt crisis, mostly for two reasons:
– First, very low interest rates and massive monetary policy support. Central banks throughout the world lowered interest rates and supplied liquidity. Swap lines quickly established helped many emerging countries maintain market access. Our latest estimation is that these measures add up to US$ 7.3 trillion.
– Second, extraordinary direct financial support, including IMF emergency financing to 76 countries; and debt service relief to the most vulnerable economies through the G20 Debt Service Suspension Initiative (DSSI, to 44 countries); and the IMF’s Catastrophe Containment and Relief Trust (to 29 members).
This support has bought the world some time. We ought to use it wisely. A pandemic-induced systemic debt crisis cannot be ruled out. The longer the problem is postponed, the worse it will become.
The Current Architecture
The existing international architecture worked relatively well before this crisis—especially if compared to the quagmire of Latin America’s debt renegotiations in the 1980s, which dragged on for years and led to a lost decade for the region.
The inclusion of enhanced Collective Action Clauses (CACs) and other mechanisms in bonded debt have facilitated faster and more pre-emptive restructurings with higher creditor participation. Since 2014, over a dozen such restructurings have happened. Argentina and Ecuador are the most recent examples.
But there are important gaps. A large stock of outstanding international sovereign bonds still doesn’t have enhanced CACs. Non-bonded debt typically does not include such majority restructuring provisions. A growing share of debt is guaranteed by collateral, making it harder to restructure. These characteristics are increasingly prevalent in Low-Income Countries.
Going beyond the report published today, the current architecture is also not fully adequate to deal with official bilateral debt. Significant amounts are owed to creditors outside the Paris Club and don’t follow its procedures or have any common restructuring framework. In the past, one debtor country negotiated with one creditor country within the Paris Club framework. Today, it has to speak with several agencies inside that country. Lack of debt transparency adds complication, by creating information asymmetries and inter-creditor equity concerns.
What to do?
Countries will continue to need support. The DSSI, temporary by design, needs to be extended, ideally for another 12 months. Otherwise, recipient countries will be forced to resume debt service at the expense of fighting the pandemic and its economic fallout. This would increase the human suffering and make a recovery even harder.
Tackle Debt Vulnerabilities Now
At the same time, countries with unsustainable debts should not delay restructuring and open negotiations with creditors before the situation worsens. Delaying only increases the costs—economic and human.
The DSSI extension should create incentives for recipient countries with unsustainable debt to tackle it promptly. For example, the extension duration could be linked to an IMF program designed to reduce these vulnerabilities—including by restructuring them if needed.
Fix Architecture Gaps
My colleagues Ceyla and Rhoda will go into the Architecture technical aspects. Let me highlight a few priorities:
- First, promote wider adoption of enhanced collective action clauses in bonds and similar provisions in non-bonded debt.
- Second, increase debt transparency to address inter-creditor equity concerns and information asymmetries.
- Third, official bilateral creditors, whether Paris Club members or not, should agree on a common restructuring framework.
The Role of the IMF
The IMF can contribute to these efforts in two main dimensions.
At the country level we will continue to support our members with financing, policy advice, and capacity development to strengthen debt management and transparency. We remain committed to providing debt service relief to our most vulnerable members.
On a global level, we can support the DSSI extension while encouraging its beneficiaries to tackle debt problems promptly. We can also facilitate debtor/creditor coordination and restructuring by providing debt sustainability analysis to determine the financing and/or relief necessary to restore sustainability; and by conditioning our own financial support on high creditor participation. And, we will continue to support the G20 in their financing and debt-relief efforts with co-financing, data and analysis.
Let me conclude. This is not the 1980s. We have better instruments and legal provisions. But that experience still haunts us, and rightly so. We know what happened: a decade of sluggish growth, low competitiveness and growing inequality.
To avoid history being repeated, we need to address mounting debt vulnerabilities now. This requires better architecture and urgent collective action—all stakeholders must do their part.
To paraphrase a saying often attributed to Abraham Lincoln, the world might be able to evade this responsibility today but cannot escape it tomorrow. Let’s not wait.
Thank you very much!
Opening remarks at the Peterson Institute for International Economics Conference Washington, D.C.