On 15 April, the G20 nations agreed to a time-bound suspension of debt service payments for the poorest countries that request forbearance. Here, we set out the details of the initiative and some of the things such countries should consider when looking at the relief available.
Introduction
Following the G20 Finance Ministers and Central Bank Governors Meeting on 15 April, held virtually, the G20 announced its plan to address the COVID-19 pandemic and the significant health, social and economic challenges it continues to pose for governments around the world (the "G20 Action Plan"). The G20 Action Plan is the latest in a number of unprecedented fiscal, monetary and financial interventions to support the global economy, maintain stability and ensure the resilience of the financial system.
The G20 Action Plan introduces a number of measures to free up funding, increase collaboration and support countries globally. This client alert will focus on the G20's debt service suspension initiative. Many countries throughout the world are facing unprecedented humanitarian, financial and economic challenges as a result of the rapid spread of the global pandemic and, for those countries that were already facing financial or economic headwinds, there are now greater difficulties in allocating sufficient resources to tackle the pandemic and its consequences.
The G20 Debt Service Suspension Initiative
One of the key measures designed to support low-income countries under the G20 Action Plan is the initiative for a time-bound suspension of loan repayments (of both principal and interest) for countries which request it (the "Initiative"). The Initiative will be welcomed by governments in countries facing the acute social, medical and economic challenges caused by the rapid global spread of COVID-19. However, before making a formal request for debt forbearance from creditors, countries considering doing so need to carefully consider the impact such requests could have on their financing agreements (both present and future).
Eligible countries
The Initiative applies to the 76 countries that are eligible to receive assistance from the World Bank's International Development Association, and to all nations defined as "least developed countries" by the United Nations. Eligible countries must be current on any debt service to the IMF and the World Bank, so countries with arrears to those institutions will be ineligible to participate.
Criteria for participation
The G20 agreed a common term sheet setting out the key features and conditions to be eligible for debt relief as follows:
- Access to the Initiative will be limited to countries which:
- have made a formal request for debt service suspension from creditors; and
- are benefiting from, or have made a request to IMF Management for, IMF financing including emergency facilities (RFI/RCF).
- In addition, each beneficiary country will be required to commit to:
- use the created fiscal space to increase social, health or economic spending in response to the crisis, with a monitoring system expected to be put in place by the IMF and World Bank;
- disclose all public sector financial commitments (debt), while respecting commercially sensitive information. Technical Assistance is expected to be provided by the IMF and World Bank as appropriate to achieve this; and
- contract no new non-concessional debt during the suspension period, other than agreements under the Initiative or in compliance with limits agreed under the IMF Debt Limit Policy or World Bank Group policy on non-concessional borrowing.
Possible consequences of participation
Whilst some countries and lobby groups have called for debt relief to be applied automatically to low-income countries, it is important to note that the Initiative is voluntary, and will only be made available to those eligible countries that request it. Accordingly, a country seeking to take advantage of the available relief needs to consider the legal consequences of making such a formal request. This is because, in some cases, existing financing contracts may contain contractual provisions that are breached by the country making a formal request for debt service suspension. Countries need to be aware of the "unintended consequences" of making such a request, and so should ensure they understand the precise contractual terms of their debt stock (including any guarantees given), if possible, before submitting a formal request for suspension.
Any fiscal space created by the debt relief would need to be used to increase specific spending in response to the crisis, the application of which would be monitored by the relevant IFIs, and so countries need to be aware that the relief needs to be reinvested in a specific way.
At the same time, countries that do receive such debt relief would not be able to contract further non-concessional debt during the suspension period other than in compliance with IMF and World Bank parameters, meaning any deficit caused by falling revenues or increased expenses would likely need to be funded from further concessional debt, rather than from commercial creditors. The restriction will likely extend to the contracting of any form of non-concessional public debt, including by state-owned enterprises included within the public debt stock. However, incurrence of non-concessional debt during the suspension period under pre-existing contractual arrangements is not prohibited by the terms of the Initiative.
Participating creditors
All official bilateral creditors will participate in the Initiative. As a G20 member nation, this would include the People's Republic of China, one of the biggest bilateral lenders to emerging market nations, particularly into Africa.
The G20 Action Plan also publicly calls on private creditors to join the Initiative on comparable terms, although this would be on a voluntary basis. It is unclear how this could be achieved in practice. Whilst there is likely to be support extended from private creditors on a case by case basis to help countries struggling with the financial impact of the pandemic, any agreement to suspend or defer payments under private financing contracts would need to comply with the terms of such contracts, including the amendment provisions.
There is also the risk that engagement with one or more creditors or group of creditors on potential debt relief measures could trigger a default under certain private financing agreements, which in turn could also give rise to claims under other financing agreements through cross default provisions. In many cases, sovereign financing arrangements do not distinguish between debt owed to the official sector and debt owed to the private sector, and so any debt relief that targets one could affect the other.
For these reasons, countries wishing to explore the possibility of obtaining debt relief under private sector debt contracts should carefully analyse the terms of all their financing agreements.
It is also likely that any action to defer or suspend payments to creditors (official or private) would result in a rating action being taken by international rating agencies related to country and bond ratings. This is something countries should also consider as this could impede future market access or make it prohibitively expensive (even if it were permitted under IMF/World Bank debt limit policies).
Duration and implementation
The Initiative applies from 1 May 2020 until the end of the year, with a possible extension based on the individual liquidity needs of eligible countries. Both principal and interest payments scheduled in that period would be suspended, with the amounts suspended being repaid over a four year period (with an initial payment holiday in the first year). As such, the suspension is intended to be net present value neutral (i.e., not a cost to creditors), and so whilst it would create fiscal space during the suspension period, it does not relieve the country of the obligation to repay the debt in the future.
The Initiative would be achieved through either a rescheduling or refinancing of debt, which again could give rise to concerns under other financing agreements, depending on the terms of those agreements (which can sometimes include default triggers where borrowers enter into negotiations with creditors with a view to reschedule or suspend payments).
Final Thoughts
The G20 Action Plan is a coordinated and responsive plan to support global financial stability and resilience and will no doubt be welcomed by governments in countries which are facing the acute social, medical and economic challenges caused by the rapid global spread of COVID-19.
However, before formally requesting forbearance from its bilateral creditors (or potentially private creditors), countries considering doing so need to carefully consider the impact such requests could have on their financing agreements. In some cases financing contracts may contain contractual provisions that are breached by making such a request. Whilst the intention of the G20 Action Plan is clear and the support it provides is likely much needed by countries facing the impact of the current global pandemic, many countries have increased their exposure to the private sector over recent years through the capital markets and infrastructure and other financing with public/private initiatives. A thoughtful approach needs to be taken by debt management offices within eligible countries to avoid any unintended consequences that may result from seeking support under the G20 Action Plan and other well-intended international initiatives.
Eligible countries should ensure that they fully understand the financing terms of their external debt stock to ensure that any decision to participate in programmes such as the Initiative do not have unintended consequences.
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