When Zambia reached a deal with its private lenders on 26 October, some celebrated it as the end of three years of stalemate since the country became the first to stop paying its debts during the pandemic in 2020. The Common Framework, the G20’s response to the pandemic-fuelled debt crisis, could work, it was claimed.
Yet within days, the deal with private lenders like banks and hedge funds was falling apart. In an unprecedented development, the deal was rejected by other government lenders and the International Monetary Fund (IMF). Although the IMF agreed to a revised offer from bondholders, government lenders have confirmed that the deal was unacceptable as it did not deliver comparable debt relief to that offered previously by governments. China, Zambia’s largest government lender, called on private lenders like banks and hedge funds to shoulder a “fair burden” of debt restructuring.
The government lenders have not published their calculations, but our analysis shows that they have cause to be concerned. In July, we published analysis with the Zambian Civil Society Debt Alliance showing that banks and hedge funds would need to cut the debt by at least 50% to match the debt relief agreed by governments.
When we and the Alliance analysed the deal with private lenders, we found that it only cut the debt by 33%.
Put another way, banks and hedge funds would have been effectively repaid 73 cents for every $1 originally lent, whereas governments will effectively be repaid only 55 cents.
This is despite private creditors lending at high interest, based on the risk of default, which should mean that they face bigger losses if the default happens.
Comparable treatment of government and private creditors matters because if banks and hedge funds aren’t forced to cancel debt to the same level as other governments, the private sector effectively gets bailed out with public money when its reckless lending goes wrong.
Even more, comparable treatment matters because it is a cornerstone of the Common Framework. Unless creditors, including China, trust that all other creditors will play a fair part in debt restructuring, it becomes impossible to agree anything.
This lack of trust is why Zambia has been waiting three years to get this far.
It is also why only four countries have applied for the Common Framework since it was set up in 2020. Across the world, countries are making cuts to vital spending on health, education and responses to the climate emergency in order to keep making payments to creditors, on unsustainable debts that may be impossible ever to pay off.
So what happens next is crucial, not just for the Zambian people but for lower income countries across the world. If private creditors agree to cancel a fair amount of debt, it could revive the moribund Common Framework, and encourage other countries to apply to it.
A fair deal would undermine private sector expectations that they get paid off in full in all circumstances, which have been fuelled by the appalling Suriname deal, and instead, establish a working example of what equal treatment really means.
A shared understanding of comparable treatment would then make it easier for the UK and New York to pass legislation to give it legal force. With legislation, countries and private creditors would know from the start how much creditors are entitled to – so negotiations should be quick and fair to all sides.
In the meantime, Zambia continues to negotiate with its private creditors. Lower income countries across the world will be watching.