Sovereign debt pressures: will we cope? G-24 Webinar on Emerging - - PowerPoint PPT Presentation

IMF IMF |

1

Sovereign debt pressures: will we cope?

G-24 Webinar on Emerging Issues on Sovereign Debt

July 28, 2020 Jeromin Zettelmeyer Deputy Director, Strategy, Policy and Review Department International Monetary Fund*

*Thanks to Dimitri Drakopoulos of the IMF’s Monetary and Capital Markets department for allowing me to use his charts and data, and to William Diao and Yuchen Zhang for research assistance.

IMF IMF |

2

Out Outli line ne

1. Debt flows to EMDE’s during this crisis: what has happened so far. 2. Debt flows to EMDE’s during this crisis: what may happen going forward. 3. Implications for crisis management. Can the system cope?

IMF IMF |

3

Lo Look

• king

ing ba back: k: be betw twee een n Mar March h an and J d Jun une, e, fi fina nanc ncing ing co cond nditions itions impr improved ed dr drama amatica ticall lly y for

• r most

most EMs EMs

Recor ecord d de debt i bt iss ssuance uance Funding unding cost costs s bac back to mi k to mid-2019 2019 le levels on a els on aver erage ge

EM Sovereign Bond Yields (Percent Index) EM USD Sovereign Issuance (Cumulative since the beginning of the year)

Sources: Bloomberg, Dealogic, JP Morgan,

IMF IMF |

4

Eur Eurob

• bon
• nd

d issu issue e bo booms

• ms in A

in Apr pril il (I (IG), G), May May an and d Jun une e (HY) (HY)

Sources: Bloomberg, Dealogic, JP Morgan,

Eurobond Monthly Investment Grade Sovereign Issuance (USD bn)

UAE (AA) UAE (AA) UAE (AA) UAE (AA) Qatar (AA-) Chile (A+) Chile (A+) Saudi Arabia (A) Saudi Arabia (A) Poland (A-) Poland (A-) Peru (BBB+) Panama (BBB+) Philippines (BBB) Philippines (BBB) Mexico (BBB) Mexico (BBB) Indonesia (BBB) Indonesia (BBB) Indonesia (BBB) Indonesia (BBB) Hungary (BBB) Hungary (BBB) Uruguay (BBB) Colombia (BBB-) Colombia (BBB-) Romania (BBB-) Romania (BBB-) Romania (BBB-) Trinidad (BBB-)

5 10 15 20 25 30 35 40 45 Jan.20 Feb.20 Mar.20 Apr.20 May.20 Jun.20 Jul.20 Eurobond monthly High Yield sovereign issuance (USD bn)

Croatia (BB+) Paraguay (BB+) Paraguay (BB+) Serbia (BB) North Macedonia (BB) Guatemala (BB) Brazil (BB-) Dominican Republic (BB-) Honduras (BB-) Turkey (B+) Jordan (B+) Bahrain (B+) Albania (B+) Egypt (B) Ghana (B) Ukraine (B) Ukraine (B) Belarus (B) Gabon (CCC+) El Salvador (B-)

2 4 6 8 10 12 Jan.20 Feb.20 Mar.20 Apr.20 May.20 Jun.20 Jul.20

IMF IMF |

5

Ho However er, , ca capita pital l fl flows ws ha have e no not t full fully y rec ecover ered ed, , an and d so some me co coun untr tries ies rema emain in cu cut t of

• ff fr

from de

• m debt

bt mar market ets

Number of countries with US$ spreads above 750 basis points EPFR EM Debt Dedicated Fund Flows and Returns (Cumulative YTD USD bn and percent)

• 20
• 15
• 10
• 5

5 10

• 20
• 15
• 10
• 5

5 10

Hard Currency fund flows Hard currency returns (RHS)

• 30
• 25
• 20
• 15
• 10
• 5

5 10

• 30
• 25
• 20
• 15
• 10
• 5

5 10

Local Currency fund flows Local currency returns (RHS)

5 10 15 20 25 30

06/19 07/19 08/19 09/19 10/19 11/19 12/19 01/20 02/20 03/20 04/20 05/20 06/20 07/20

EMEs LICs

2 11 6 6

IMF IMF |

6

Lo Look

• king

ing for

• rwar

ard: co d: cont ntinu inued ed ea easy sy co cond ndition itions—for

• r a

a sh shrink rinking ing grou

• up

p of

• f cou

count ntries ries th that t ret etain ain fi fisc scal al sp spac ace

Debt flows will be the result of two opposing forces: (1) continued very easy conditions in advanced economies; (2) shrinking room for additional borrowing in EMDEs, as debt ceilings are reached. Three groups of EMDEs. 1. Solvent countries: benefit from relatively easy financing conditions and ample official safety nets (including IMF precautionary facilities). 2. Conditionally solvent countries: risk losing market access, but retain access to official borrowing (with standard conditionality). 3. Insolvent countries (unsustainable debts): no market access; access to official borrowing

• nly conditional on a debt restructuring.

As the pandemic crisis drags on, more countries will move from 1 to 2 and from 2 to 3.

IMF IMF |

7

It will It will ge get t wor

• rse

se

This may or may not mean that debts become unsustainable.

100 105 110 115 120 125 130 135 30 40 50 60 70

2018 2019 2020 2021

General Government Gross Debt Projection, 2018–21 (Percent of GDP)

Emerging Market Economies Low-Income Developing Countries Oil Producers Advanced Economies (Shown on the right axis)

Source: World Economic Outlook update, June 24, 2020

• 10
• 5

5 10 15 20 25 2019 2020 2021 2022 2023 2024

Sensitivity Analysis for EME Government Debt/GDP projection (Percentage point deviation from baseline)

Second Outbreak in 2021 Faster Recovery Starting in the Second Half of 2020

IMF IMF |

8

Res estr truc uctu turin ring g un unsu sust stain ainable ble de debt bts: s: th the e st stan anda dard d (ca (case se by by ca case se) ) app pproa

• ach

1. Country at risk of losing or has lost market access—asks for IMF support. 2. IMF determines if debt is sustainable; if not, required “envelope” of debt relief. 3. IMF supported program conditional on a process being in place that restores debt

• sustainability. Typically requires: (1) a credible restructuring offer to private creditors under

way; (2) an agreement in principle with (or credible and specific assurances from) official sector creditors. 4. Program typically catalyzes support from other IFIs, including World Bank; fresh money from bilaterals. Provides finance to (again) solvent country until market access is restored.

IMF IMF |

9

Co Could uld th this is app pproa

• ach

h ge get t over erwhe helmed lmed?

The number of countries looking to multilateral agencies for support and running into legal disputes with creditors could make this the worst emerging-market debt crisis since the 1930s at least, said Kenneth Rogoff, chief economist of the IMF from 2001 to 2003 … “They can’t handle that—the New York and London courts can’t, the IMF can’t,” he said. “It is a case of too many patients coming to the hospital at once.” (WSJ, July 27 2020) No Not t so so sur sure.

• So far, no systemic debt crisis (thanks to relatively easy global financial conditions).
• Even if we get one: the debt restructuring/IMF “hospital” is run by (existing) country by

country “wards”. Courts come in later, if at all.

• Problem in the 1980s was not that the system was overwhelmed, but that the system

confused solvency crises with liquidity crises. We have learned.

IMF IMF |

10

This his do does es no not me t mean an th ther ere e is is no no pr prob

• blem

lem

1. Procrastinating debtor countries (ask for help too late). 2. Difficult private creditors/holdouts.

• “Enhanced CACs” help, but not a panacea:

➢ Only around 50 percent of stock; ➢ First “tests” delivering mixed results. Creditor collusion in response to greater flexibility? ➢ Do not help coordination between bond holders and other claim holders (banks, commodity traders … no CACs); ➢ Presence of collateralized debt.

3. A new challenge: official creditor coordination (Paris Club vs. non Paris Club)

IMF IMF |

11

Ov Over erco comin ming g th thes ese e pr prob

• blems

lems if if t thin hings gs ge gets ts ba bad

• IMF assurances policies can help address some of the free riding/coordination problems

across creditor classes (require assurances to achieve high participation).

• Most creditor coordination failures can be solved by the debtor, given sufficient legal and

political cover.

• It is in the power of the official sector (e.g. G20, UN security council members) to provide

such cover: ➢ “State of necessity” (Bolton, Buchheit et al) ➢ Domestic legislation (or in the case of the U.S., Presidential Executive Order) that curtails power of holdouts to enforce ➢ UN security council declaration that acts internationally with the same effect.

• But doing so requires a common sense of purpose among the big countries.