The executive secretary of the United Nations Economic Commission for Africa (UNECA), Vera Songwe, affirmed that Angola was the only country thus far that has managed to restructure private debt without implying a downgrade in its credit rating.
“Angola was a kind of precursor to what the Common Framework for Debt Treatment beyond the Debt Service Suspension Initiative (DSSI) should be, because in a way the authorities were able to negotiate with Chinese public and private creditors and had long talks towards resolving the debt, before the Common Framework was launched, they were lucky and did it quickly”.
In an interview with news agency Lusa on Monday, on the sidelines of a conference between African finance ministers, the official confirmed the view that joining this initiative launched by the G20 to deal with unsustainable debt beyond the DSSI, invariably implies a rating downturn.
“You can’t have the cake and eat it at the same time,” said Vera Songwe, noting that “so far there have been three countries that have joined the Common Framework, while there have been 27 that have joined the DSSI, allowing to release US$5B ”
DSSI, she continued, “does not directly affect the rating, whereas the Common Framework does, we have to be very clear in this, because it is a restructuring of the private debt and when one adheres, there must necessarily be a comparable treatment between private creditors and public creditors ”.
A drop in the rating is not the end of the world, she defended.
“…whoever needs a debt restructuring has to call it that and say it, because there is too much stigma. If the debt is unsustainable, it is better to adhere to the Common Framework than to have a disorderly evolution of the problem,” she said, noting that the process is still ongoing “because no country has completed the Common Framework”.
Asked whether UNECA advocates for debt forgiveness or debt relief, Vera Songwe replied:
“Debt forgiveness or restructuring in countries with market access leads to an immediate drop in the rating, but for the very, very poor, we continue to defend forgiveness, because, for example for Mali, market access is not a concern, because they do not have viable opportunities to meet their financial obligations ”.
She recalled that the IMF “has already forgiven debt to the 17 very low-income countries, under the Rapid Relief Facility”, and for that reason debt relief, that is, the suspension of payments, must be for countries that have a good macroeconomic environment.
The “Common Framework for Debt Treatments beyond the DSSI” is a new instrument for dealing with sovereign debt vulnerabilities. It is available to the same set of countries that are eligible for the Debt Service Suspension Initiative (DSSI) and involves the same group of 39 official bilateral creditors from the G20 and the Paris Club.
While the DSSI aims to provide fast relief to the pandemic shock for a broad range of low-income countries, the Common Framework focuses on cases involving a challenging debt burden. The priority is on maturity extensions, while haircuts are reserved for exceptional cases.
Private-Sector Involvement Required
Most importantly from a rating perspective, the Common Framework explicitly requires debtor countries to seek comparable treatment by other external creditors, including the private sector, while the DSSI had only encouraged private-sector participation.
There is still some uncertainty, not least because the Paris Club can make exceptions. However, previous Paris Club agreements (other than the DSSI) have typically required private-sector participation.