New research released today by Debt Justice[1] shows that private lenders will still make $14 billion profit on loans to lower-income countries, even after agreeing limited debt relief.[2]
The research covers debt restructurings in six countries: Chad, Ghana, Sri Lanka, Suriname, Ukraine and Zambia.
Heidi Chow, Executive Director of Debt Justice, said:
“Finance companies are raking in huge profits even after debt restructuring, because countries are not getting enough debt relief. The G20 and IMF need to make major changes to the debt restructuring process, and the UK and New York should pass legislation to ensure all private creditors comply with debt relief agreements. Debt restructurings should not leave countries still just one climate or economic shock away from another debt crisis.”
Bernard Anaba, Public Policy Specialist at the Integrated Social Development Centre (ISODEC) in Ghana said:
“This evidence shows that private lenders could deliver more debt relief for countries in debt crisis. This would help ensure countries do not relapse into debt crisis soon after the relief. Private lenders have a duty under the Sustainable Development Goals to support development, not just make large profits.”
The research also finds that the debt relief deals will leave the six countries paying an average of over 20% of government revenue on external debt service, more than is paid by two-thirds of lower-income countries.[3] And that on average, private creditors are being repaid 28% more than government creditors.[4]
However, debt restructuring is still saving lower-income countries money compared to paying the debts in full. The research finds that government external debt burdens will be on average 18% lower after debt relief, saving a total of $30 billion over time.
The large private sector profits after debt relief reflect the high interest rates that were charged on the original loans, and in many cases continue to be charged on the restructured debt. They are also the result of the low prices bond have been trading at for many years for the countries covered by the study.
G20 Finance Ministers are due to discuss progress on debt restructurings at their forthcoming meeting on 24 October, and at the International Monetary Fund and World Bank Annual Meetings on 21-27 October in Washington DC.
Notes
[1] The full research is available at https://debtjustice.org.uk/wp-content/uploads/2024/10/Restructurings-comparison_15.10.24.pdf
A spreadsheet with all the calculations in the research is available at https://debtjustice.org.uk/wp-content/uploads/2024/10/Restructurings-in-six-countries1_10.24.xlsx
[2] To estimate private sector profit following restructuring deals we have used two methods. Firstly, we assume bondholders bought the debt at face value when it was issued and have held it ever since. We calculate the total cash flow received on the original bond, the lack of payments during any default, and then the new cash flow from the restructured bond. We discount the cash flows by the interest rate lenders could have got if they had lent to the US government at the time the bond was first issued, over a time period covering the whole length of the payments – original and restructured.
Secondly, to estimate potential profit for more recent buyers of debt, we have used the average price over a period of years after a country’s bonds have fallen in value. We have then calculated the cash flow from the default, including the period of no payments during default, and discounted it by the interest rate that lenders could have got from the US government at the time, and over the period of time of the cash flow. The estimated profit is how much more the bond buyer will make than if they had lent to the US government instead, and it assumes that bondholders will be paid in full on the restructured debt schedule.
In cases where there are changes in payments based on future outcomes (Sri Lanka, Suriname and Zambia) we have done both sets of calculations for all bonds for the baseline, and the lowest and highest payments for bondholders.
This gives a range of scenarios. To calculate a central estimate for the profit private creditors could make, we have assumed that:
- Half of bonds have been held since they were first issued
- Half were bought at the average price over recent years
- Where there are changes in payments, the lowest, baseline and highest scenarios are all equally likely
[3] We have calculated external debt payments after restructurings from IMF documents. These estimates are therefore based on IMF predictions of economic growth and change in government revenue and debt payments, which have historically tended to be overoptimistic.
[4] To compare payments to bilateral and private creditors, we have calculated the Net Present Value of the cash flows scheduled to creditors, from the date the debt restructuring negotiations commenced, so including periods of default. For this calculation we have used the IMF’s discount rate of 5%. We have then compared the amount the creditor group is due to receive in Net Present Value terms to how much debt stock was owed at the start of the restructuring process (i.e. the amount lent). This gives a percentage for how much a creditor group is due to receive, compared to how much it lent, which can then be compared between creditor groups. This assumes the debt payments will be met in full and on time. We believe that this is the best method to compare creditor participation in debt relief, because it directly compares how much a creditor will get back after debt relief with how much was lent.