The COVID-19 virus does not distinguish between rich and poor countries, but there is a growing worry that the global economic havoc caused by the pandemic will make it difficult for low and middle-income countries to service their debts.
In response, the Group of 20 earlier this month issued a communiqué saying it agreed to a halt on loan repayments for the remainder of 2020 from 76 of the world’s poorest countries, which include the so-called International Development Association nations, plus Angola.
But according to a group of researchers, including finance professor Patrick Bolton, the G20’s economic overture is likely to fall short as it omits several low-to-middle-income countries, such as Argentina and Mexico, that are facing extreme financial strains in the wake of the pandemic. More importantly, the plan excludes any participation from private creditors, except on a voluntary basis.
“Private creditors are saying they want debt relief to be done on a case-by-case basis,” says Bolton, the Barbara and David Zalaznick Professor of Business. “There is agreement among many people that this is inadequate and is going to be an unwieldy and inefficient way of delivering debt relief.”
In a new paper published in the Centre for Economic Policy Research Policy Insight series Bolton and his co-authors propose the creation of a new financial mechanism that would coordinate debt service to private lenders and the official sector from low and middle-income nations to ensure that debt relief could be used for pandemic-related expenditures.
“It is pointless and unfair for the G20 to provide debt relief for developing countries if the freed resources flow immediately into the hands of hedge funds in Greenwich, Conn.,” Bolton writes this week in VoxEu.
Bolton proposes that a multilateral institution, such as the World Bank, create a central credit facility that would operate like a trust, letting countries in need of debt relief deposit interest payments to both the G20 as well as private creditors for the reuse for emergency funding to combat COVID-19 issues.
“The assumption would be, because that becomes the default, a lot of private creditors would sign off,” Bolton says. “Then we would have a way of getting all private creditors to suspend debt obligations in tandem with the pause in debts to the G20.”
The research estimates that a 12-month debt standstill from both the private sector and the G20 would result in as much as $800 billion in resources for emerging and developing nations.
There is, however, the possibility that a private lender could contemplate legal action against the proposed credit facility, but Bolton believes the plan falls under the doctrine of “necessity” in international law – a set of circumstances that force nations to suspend certain legal obligations to meet urgent domestic needs.
Bolton and his colleagues have communicated their proposal to the World Bank, the International Monetary Fund, and the G20. The editorial page of the Financial Times last week mentioned the plan as a possible remedy to the debt service crisis.
“This is all playing out in real time,” Bolton says. “The more it gets talked about, the more governments and multilateral lending institutions will take it seriously.”
About the researcher
Patrick Bolton is the David Zalaznick Professor of Business. He joined Columbia Business School in July 2005. He received his PhD from the London School...Read more.