In November 2020, private creditors rejected the Zambian government’s request for a six-month standstill on debt payments on one of their Eurobonds. As a result, Zambia became the first African country to default on its debt since the start of the pandemic.
But this is not just the case for Zambia. Large banks and speculators, like HSBC, Blackrock, UBS and JP Morgan, have so far refused to engage in debt relief for the world’s poorest countries through an international process initiated at the G20.
My organisation, Jubilee Debt Campaign, alongside Cafod, Christian Aid and Global Justice Now, has launched a new campaign targeting some of the world’s richest banks for continuing to demand large debt repayments from developing countries during COVID-19.
“Many private creditors are expected to make big profits from developing country debt during the pandemic, leaving poorer countries with less to spend on tackling the crisis. There is an urgent need for private creditors to cancel the debt”
External debt levels in developing countries had already been increasing following the 2008 financial crisis, but the impacts of the pandemic have pushed many more countries to the edge, or even into, debt crisis.
Six countries had already defaulted on debt payments by the end of 2020.
This means developing country governments are having to use scarce resources to pay their debts, as opposed to responding to and recovering from COVID-19, and ensuring the health, wellbeing, and rights of their citizens.
Vera Songwe, Head of United Nations Economic Commission for Africa, has observed that “Our leaders have two choices, you either pay obligations to the bondholders or you buy medicine, food, and fuel for the population”.
While developing country debt is owed to a variety of creditors, including governments and multilateral institutions, private creditor debt plays a significant role.
This is because of the higher interest rates typically attached to private loans, because a substantial proportion of external developing country debt is owed to private creditors, and because a lack of private sector involvement disincentivises other creditors from engaging in debt relief due to concerns that freed up resources will simply be used to pay back private loans.
African governments alone are expected to pay $23.4 billion in debt repayments to private creditors in 2021 – that is over three times the cost to purchase vaccines for the entire continent.
As a response to the worsening debt crisis, the G20 have introduced two initiatives to ease the debt strain on developing countries. The first is the Debt Service Suspension Initiative which low-income countries can apply to for a suspension to debt payments. The second is the Common Framework for Debt Treatments beyond the DSSI which aims to act as a mechanism for broader debt treatment on a case-by-case basis for eligible countries that request it.
The DSSI is entirely voluntary, so unsurprisingly no private creditor has taken part in the suspension. The Common Framework says private creditors should participate, but G20 governments have failed to give debtor governments any support to negotiate debt reductions with private creditors.
Without a robust mechanism compelling them to engage in debt relief through the Common Framework or other processes, private creditors have refused to engage, even when explicitly requested.
Furthermore, if countries find that they are unable to pay and must default on their loans, private creditors can take the debtor government to court in the hope of being paid the full amount owed.
This is especially unjust given that private creditors lend to developing countries at higher interest rates because of the risks associated with lending to poorer countries. Now these risks have materialised through an unprecedented pandemic, it is only right that private creditors take on their share of the losses.
One solution would be to introduce legislation that would make it more difficult for private creditors to refuse to engage in debt relief – an idea that has already been put forward by legislators in New York. Given that a large proportion of developing country external debts are governed under English law, the UK is a key jurisdiction for this to happen.
The UK Government is in a strong position to show global leadership on this issue through the G7 Presidency, and we urge them to find tangible ways to compel private creditors to engage in debt relief for developing countries.
Without action, this injustice will continue. Private creditors will continue to profit from developing country debt payments, draining vital resources needed to respond and recover from the pandemic.
– Tess Woolfenden, Senior Policy and Research Officer
Reprinted with permission from Public Finance Focus, 01 April 2021. Read the original piece here: https://www.publicfinancefocus.org/viewpoints/2021/04/debt-cancellation-needed-aid-covid-19-fight