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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Marina Zucker-Marques is from SOAS University of London and Kevin Gallagher is from the Boston University’s Global Development Policy Center.
Zambia’s debt restructuring deal with bondholders has been nixed by its Official Creditor Committee because it breached of the ‘comparability of treatment principle’ — where no creditor should receive more favourable treatment than the others.
As noted here in Alphaville, Zambia’s bondholders are “very disappointed” and “deeply concerned”, warning of the dire consequences of the deal getting scuppered:
As bondholders, we have gone above and beyond to present a solution that has won the support of the Zambian authorities and the IMF. Now the OCC is inexplicably blocking the path to restoring’s Zambia’s debt sustainability by dictating terms it has no right to define. The OCC’s intransigence risks inflicting severe damage to Zambia’s economy and poses an existential threat to the entire viability of the Common Framework, impacting the emerging markets asset class.
Their disappointment is no doubt heartfelt, but the G20 should be even more disappointed and concerned, as the bondholders have derailed Zambia’s efforts — and perhaps the entire G20’s Common Framework that was supposed to help countries in debt distress — just as it looked like a completed deal was around the corner.
After more than a year of all but declaring the Common Framework incapable, the bondholder committee finally struck a deal with Zambia last month. After presenting a slightly revised proposal, the bondholder group declared that further concessions were not feasible on their part.
It’s true that bondholders have accepted a higher upfront haircut on their claims than official creditors like China. Here are the bondholders’ calculations for two Zambian scenarios.
However, the inclusion of three years worth of arrears in the debt negotiation and much faster repayments in reality erodes any substantive relief.
The near-term financial burden in the base case is what China et al are objecting to. Here’s what the Zambian finance ministry said it had been told after the deal collapsed.
The OCC, through its Co-chairs, concluded that Comparability of Treatment would not be achieved in the Base Case scenario, although would be achieved in the Upside Case scenario. The OCC stated that the [agreement in principle], despite similar present value concessions to the deal agreed between the Government and the OCC, was not in compliance with the Comparability of Treatment in the Base Case scenario due to a shorter extension of the duration and lower contribution to the closing of the balance of payment financing gap during the IMF program period. The fact that bondholders have agreed to nominal face value concessions (“haircut”), while the OCC members have not, is not considered a mitigating factor since the haircut is not part of the criteria listed in the G-20 Common Framework to assess Comparability of Treatment.
Moreover, Zambia’s bondholders have already covered some losses, as they charged high interest rates to factor in “ex ante” default risks. While bondholders could have charged about 2 per cent for US bonds in 2015, they instead collected an annual coupon of 8.97 per cent for Zambia.
It’s therefore entirely appropriate for bondholders to absorb proportional “ex post” losses. By analysing the average interest rate charged by each creditor group and the financing from external debt restructuring needed for Zambia ($7.6bn, according to the IMF), you can estimate the extent of debt relief that the bondholders should ideally offer.
Instead of the 16 per cent face value discount currently offered, bondholders should assume at least 78 per haircut — in a scenario MDBs are included in debt relief — or 83 per cent when MDBs’ claims are excluded, as shown here.
The participation of bondholders in unequal terms — as it is currently the case — provides a morally hazardous message: they bear no responsibility in their lending practices, and their returns will invariably be protected. This stance isn’t just perilous; it fundamentally undermines the principles of responsible lending and equitable risk-sharing in international finance.
While the deal collapsing is a travesty, it is better than if a deal had occurred on the proposed terms. The breached deal would have likely returned Zambia to default in a few years. New claims surpass the originally agreed amounts and cash flows returns can yield as high as 5.8 per cent per year- a heavy financial obligation on Zambia.
Finally, the fact that bondholders’ offer is less favourable than that of the official creditors essentially implies that public funds are used to rescue private investments.
The G20 Common Framework has thus far failed to give any country debt relief since its inception, yet 11 countries have now defaulted on their debt and more 48 are at or near debt distress. The flaws in the framework are becoming all too clear, and needs a major reset in the new year.
Read the full article here