Volume 13, Issue 2 - Special Issue: On Sovereign Debt and Development; Guest Editors: Andrea F. Presbitero and Ugo Panizza

When the COVID-19 pandemic added to already elevated debt vulnerabilities in low-income countries, the G20 launched the Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatments beyond the DSSI, which have provided limited relief so far. For several countries, deeper and more wide-ranging debt treatments will likely be needed to secure future debt sustainability. This paper looks at the Heavily Indebted Poor Countries (HIPC) initiative, the largest and most comprehensive debt relief effort for low-income countries to date, as a potential reference point for the 2020s. While the HIPC initiative appears to have been a qualified success, its replication in the current context would be infeasible and undesirable. Creditor base heterogeneity justifies a more flexible, differentiated approach to debt restructuring. Yet, the HIPC experience holds valuable lessons. “Delay and replay” tendencies should be avoided. Involving commercial creditors is a real challenge, requiring carrots and sticks. And imposing extra conditionality on debt relief proceeds could be helpful but should not be overdone. Even if the Common Framework is unlikely to suffice in case of a systemic debt crisis, its inter-creditor dialogue could perhaps serve as the basis for a more inclusive advisory body or forum for debt restructuring.

The COVID-19 pandemic has triggered a massive increase in global debt levels and exacerbated the trade-offs between the benefits and costs of accumulating government debt. This paper examines these trade-offs by putting the recent debt boom into a historical context. It reports three major findings. First, during the 2020 global recession, both global government and private debt levels rose to record highs, and at their fastest single-year pace, in five decades. Second, the debt-financed, massive fiscal support programs implemented during the pandemic supported activity and illustrated the benefits of accumulating debt. However, as the recovery gains traction, the balance of benefits and costs of debt accumulation could increasingly tilt toward costs. Third, more than two-thirds of emerging market and developing economies are currently in government debt booms. On average, the current booms have already lasted three years longer, and are accompanied by a considerably larger fiscal deterioration, than earlier booms. About half of the earlier debt booms were associated with financial crises in emerging market and developing economies.

In the wake of the COVID-19 pandemic, debt levels in emerging and developing economies have surged raising concerns about fiscal sustainability. Historically, negative interest-growth differentials in these countries have played a debt-stabilizing role. But is this enough to prevent countries from falling into debt distress? Drawing from a sample of 150 emerging and developing economies going back to the 1970s, we find that interest-growth differentials have remained relatively low dampening debt increases in the run up to a crisis. But in the face of persistent primary deficits, debt service tends to rise abruptly—particularly in emerging markets—and a fiscal crisis ensues. There is also evidence that a large part of the debt build-up around crises stems from valuation effects associated with external debt and the materialization of contingent liabilities. These findings underscore that, though not necessarily a red-herring, low interest-growth differentials cannot fully offset the deleterious effects of large fiscal deficits, forex exposures, or hidden debts.

A paucity of data has thus far made systematic comparative analysis of emerging bilateral creditors a major challenge. In this study I take advantage of new World Bank data on the sovereign creditors of low- and middle-income countries to map the distribution of lending from the key emerging bilateral official creditors during the 21st century, focusing on the BRICs (Brazil, Russia, India, and China). I then statistically analyze the political and economic factors that drive BRICs’ lending and investigate whether their motivations and terms are different from each other and from “traditional” creditors. The results suggest that concerns about the BRICs using bilateral credit as a foreign policy tool may be overblown. Instead, BRICs official loan commitments are driven by their trading ties with borrowers, and are complements to rather than substitutes for traditional lenders. However, the results also show that countries which borrow proportionately more from the BRICs face significantly less concessional terms on their official external debts compared to borrowing from traditional OECD lenders. Given the growing importance of emerging bilateral creditors, systematic comparative understanding of their motives and behavior has substantial policy relevance, in particular amid COVID-19 induced economic distress across much of the developing world.

This article introduces the Haitian Independence Debt of 1825 to the odious debt and sovereign debt literatures. We argue that the legal doctrine of odious debt is surprisingly and perhaps indefensibly narrow, possibly because of historical contingency rather than any underlying logic or principle. The story of the Haitian Independence Debt of 1825 serves as an illustrative case study. In the context of telling that story, we provide estimates of the evolution of Haiti’s external debt-to-GDP ratio over 1825–2020, and discuss the implications of the independence debt for the economy of Haiti. We conclude by discussing the implications of Haiti’s Independence Debt for the doctrine of odious debt and the possibilities for Haiti to recover compensation.

Sovereign state-contingent instruments (SCDIs) have been suggested as complements or alternatives to traditional sovereign debt instruments for a long time, but with little uptake. Markets for SCDIs have suffered from low liquidity and issues around measurement. This article argues that the escalating climate and ecological crises provide a strong rationale to reconsider the use of sovereign SCDIs as the physical and transition impacts of climate change and environmental degradation are increasingly altering the risk profile of sovereigns. The use of risk-linked sovereign instruments such as cat bonds or resilience bonds and embedding disaster risk clauses in sovereign debt contracts would be an important way for governments, especially in highly climate-vulnerable countries, to mitigate climate risks and scale up investment in resilience. Moreover, instruments such as sustainability-linked bonds that incentivise sustainability-oriented policies and investments could help to bring about better sustainability outcomes and contribute to greater debt sustainability. SCDIs can also play an important role in facilitating debt restructurings. The international community, supported by key institutions like the IMF and the major multilateral development banks, should make a concerted effort to promote the widespread adoption of sovereign SCDIs to support better public debt management, the climate-proofing of public finances, and the achievement of more ambitious sustainability outcomes.

This paper draws on newly expanded BIS government bond statistics to document how emerging market sovereigns have reduced their reliance on foreign currency denominated bonds since the emerging market crises of the 1990s. With external funding still important for emerging market governments, they have increasingly been able to borrow from foreign investors in their domestic currency. In this respect, emerging market governments are overcoming “Original Sin”. The flipside of these developments is that foreign investors increasingly bear the currency risk associated with fluctuations in emerging market exchange rates, making foreign investors’ portfolio decisions more sensitive to prevailing global financial conditions. Emerging markets thus remain vulnerable to reversals of investor sentiment in bond markets, whether or not they have outstanding debt in foreign currency.

The timely and orderly resolution of sovereign debt crises has long been a key challenge facing the global financial architecture. The framework for crisis resolution evolved in response to the capital account crises of the 1990s (Mexico, Russia, Southeast Asia), the Argentine crisis of 2001 and its aftermath, and the Global Financial Crisis of 2008–9 which morphed into the Euro area debt crisis of 2010–12. Efforts to expedite crisis resolution involved a two-pronged approach, one focusing on IMF policies and lending facilities and the other on ways to overcome the collective action problems involved in restructuring securitized debt. This paper examines these efforts in the context of the crises that triggered them and provides some guidance for the future. It argues that the way forward involves action on several fronts, including restoration of the essential principle that IMF programs should aim at reaching a manageable debt position within the program period with a high probability.