Sovereign debt distress rise prompts Bretton Woods group action plan

LONDON (Reuters) – The Bretton Woods Committee has formed a working group of senior bankers, academics and lawyers to propose ways to resolve a rise in sovereign debt distress in emerging markets as a result of the COVID-19 pandemic.

The influential U.S.-based non-profit organisation said it will examine how to promote greater transparency around sovereign debt and achieve equitable burden sharing among all creditors, namely official, bilateral and private sector.

Poor nations around the world are battling a large build-up in debt resulting from lower economic growth and higher budget deficits as the coronavirus crisis tightened its grip.

The group formed by the Bretton Woods Committee will also consider how to engage private sector creditors in any debt relief schemes, as well as analysing options for state-contingent financing, which link a country’s debt service payments to its capacity to pay.

It aims to publish a series of papers over the next 12 to 18 months for use by policymakers, debtor countries and creditors.

Countries using the G20’s Debt Service Suspension Initiative (DSSI) are due to pay bondholders just over $6 billion and other commercial lenders $6.5 billion this year, according to the European Network on Debt and Development (Eurodad).

The Bretton Woods Committee was set-up in 1983 and aims to champion global efforts to spur economic growth, alleviate poverty and improve financial stability.

Among the ideas the working group will consider include enlisting rating agencies to take disclosure and transparency into account in rating sovereign credit.

To help encourage greater participation from the private sector in debt restructuring processes, it will consider ideas such as exchanging the debt of distressed sovereign borrowers for new bonds linked to the United Nations Sustainable Development Goals.

Another is whether to widen the use of clauses that allow sovereign borrowers to defer payments in the event of extreme weather such as hurricanes.

Last year, the International Monetary Fund and the World Bank launched the Debt Service Suspension Initiative (DSSI) and its accompanying Common Framework to help low-income borrowers.

But many government have appeared hesitant to tap the latter, in part due to fears that private sector debt relief will trigger a default in the eyes of credit-ratings agencies.

Ethiopia was downgraded by Fitch and S&P after it said in January it would be the first country with an international government bond, and not already in default, to use it.

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