Rising public debts from private lenders – red flags for Southern governments

Watch the recording of the webinar here.

Warning of greater fiscal risk amid the multiple crises, experts and debt justice campaigners called attention to rising public debt from private creditors and discussed ways to address this in a webinar organized by APMDD last June 21. 

The discussion, Public burden, private gain: Sovereign debt “relief” from private lenders, took place against a backdrop of swiftly and massively accumulating public debt. World Bank debt statistics show that low- and middle-income countries (LMICs) incurred  $8.6 trillion of external debts as of end 2020, of which $3.4 trillion of are public and publicly-guaranteed long-term debts.

In her opening remarks, APMDD’s Mae Buenaventura said that, “An increasing portion of these debts are owed to private creditors whose shares in public external debt have steadily increased over the years – from 38% in 2000, 45% in 2010 and 60% in 2019.”

World Bank data also reveals that 63% of LMICs’ long-term public external debts are owed to private creditors, mostly in the form of bonds. In South Asia, their share is 38% while in East Asia and the Pacific region (excluding high income countries), it is a staggering 73%.

Global Policy Forum’s Bodo Ellmers explained the beginnings of this trend. “Private lending became such an important source of finance for governments in the Global South in recent years because of much liquidity on financial markets flowing mostly from richer countries, from developed countries to developing countries. Developing country governments hence had no problems in accessibility to financial markets and took out loans at higher costs. However this will entirely change now because of the massive liquidity squeeze on financial markets.” Buenaventura further noted that the share of private lenders has now overtaken official creditors in many countries, especially in middle-income countries where commercial banks and debt securities markets have been tapped to finance public spending. Official creditors—which include bilateral and multilateral lenders—offer some (not all) concessional loans which carry lower interest rates and longer payment terms than commercial loans.

Indebted countries commonly borrow fresh loans to service interest and principal payments falling due. Ellmers warned that the increase of interest rates in several central banks have an enormous impact on the debt service costs and on the conditions to which countries can access private debt.

Privately-held sovereign debts have largely been untouched by the failed Debt Service Suspension Initiative (DSSI) and the succeeding Common Framework by the G20 with support from the most influential Northern nations and leading multilateral financial institutions. They proved ineffective in bringing private lenders to restructure public debts in any significant terms that will enable Southern borrowers grappling with health and economic crises. 

Tim Jones of Debt Justice (UK) spoke on attempts by Southern nations seeking debt relief from private lenders. He said that while there are definitely challenges to restructuring and defaulting on debt, it is in the interests of private creditors to “make these challenges appear overly complex and insurmountable so that governments do not initiate restructuring and continue servicing debts until they pay in full where the creditors make most of the profit.”

In Argentina’s case, Patricia Miranda of Red Latinoamaricana por Justicia Economica y Social  or Latindadd shared that, “The negotiation process was very difficult and was probably more in the favor of the creditors…[this] only reflects the urgent need of having a fair, timely, binding, independent and comprehensive debt restructuring process.” 

One of the difficulties of governments in restructuring debts from private creditors is that they  have to deal with multiple parties – none of whom are bound  by any rules, standards or authoritative bodies to renegotiate with their borrowers.  

Iolanda Fresnillo of the European Network on Debt and Development pointed out the “…need to challenge the narrative that the objective of any country should be maintaining and keeping market access… development shouldn’t also be dependent on whether a country has access to financial markets.” She added that “structural reforms should be pushed for as well as rules-based transparent framework in the debt restructuring process with strengthened citizens’ participation as oversight.” 

Pooja Rangaprasad from the Society for International Development emphasized the importance of pushing for a system-wide reform that will be supportive of the South in tackling private creditors. One of the ways is by urging the United Nations to finally convene the 4th Financing for Development Conference. 

“There is a lack of representation of the Global South in decision-making on debt sustainability assessments, debt data and policy lending and restructuring and debt statistics… The core challenge that really needs to be addressed is the need for a multilateral legal framework in [the] UN and for developing countries to be coordinated to protect their collective interests,” Rangaprasad concluded.

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