Key takeaways from the Global Sovereign Debt Roundtable

Sovereign debt has become a growing challenge for many emerging markets and developing economies, with countries struggling to secure debt relief while ensuring their long-term development goals. The Global Sovereign Debt Roundtable (GSDR) was established in response, co-chaired by the International Monetary Fund (IMF), World Bank, and G20 Presidency (currently, Brazil). The last meeting of the GSDR took place in mid-September. But what exactly is the GSDR, what was discussed there, and how could these discussions impact the future of debt restructuring and debt sustainability?

Why Is Restoring Sovereign Debt and Keeping It Sustainable Becoming Increasingly Complex?

Restoring and keeping sovereign debt sustainable has grown complex due to the increasing number and variety of creditors, rising global interest rates, and the substantial refinancing needs of many nations, particularly emerging markets and developing economies (EMDEs).

Major crises like the COVID-19 pandemic and global challenges like climate change have added to these financial pressures, making it harder for nations to balance debt repayment with the investment needed for recovery and development. These factors have raised serious concerns about the long-term sustainability of debt in many EMDEs.

While several international initiatives have been introduced to address these challenges, many have fallen short and are facing significant implementation issues.

The most notable innovation in the debt landscape since the pandemic has undoubtedly been the Common Framework for Debt Treatments. It provides low-income countries with a mechanism to restructure unsustainable debts from both Paris Club and non-Paris Club creditors, as well as private creditors. While the framework was a significant diplomatic achievement at the time of its adoption, its impact has been limited. Since November 2021, only four countries-Chad, Zambia, Ethiopia, and Ghana-have applied. One of the main reasons for low uptake is how long the process takes, which often leaves countries in a difficult position.

Although a diplomatic achievement, the Common Framework for Debt Treatments has faced implementation issues, resulting in limited impact.

While a widespread debt crisis has been averted, many low-income countries and EMDEs continue to struggle with high levels of debt vulnerability. According to the IMF, one fifth of emerging economies and more than half of low-income countries remain at high risk of debt distress. Among them, 48 spend more on interest payments than on health and education.

What Is the GSDR?

The GSDR is an informal forum that convenes a diverse group of stakeholders, including finance ministers, central bank governors, civil society representatives, and international organizations. Its objective is to build a greater common understanding among key stakeholders involved in debt restructuring. It addresses the lack of coordination among creditors, the increasing complexity of the sovereign debt landscape, and the urgent need for innovative financing mechanisms to support sustainable development and climate goals

The GSDR complements the Common Framework for Debt Treatments by contributing to building a consensus around debt restructuring processes, both for countries participating in the Common Framework and for those outside of it.

During the open meeting held in September, participants discussed proposals to provide targeted financial support to countries facing severe liquidity challenges. These proposals included debt-for-development and climate swaps, state-contingent debt instruments, and debt buybacks. The discussions highlighted the need for structured mechanisms for debt relief that encourage collaboration among creditors and leverage concessional resources from international financial institutions.

By aligning debt relief efforts with broader development goals, these proposals aim to empower vulnerable nations to invest in critical areas such as climate adaptation and social infrastructure, ultimately fostering sustainable economic growth and stability in an increasingly volatile global environment.

What Key Proposals Were Discussed, and What Are Their Potential Implications?

The Bridge Program is one of the most prominent solutions discussed at the GSDR, gathering support among Paris Club creditors and gaining traction with the G20. It aims to provide short-term relief to countries with manageable debt levels that are facing liquidity issues. The core idea is to involve debtor nations, international financial institutions, and creditors in a structured program. Debtor countries would develop national investment programs, international financial institutions would scale up financing, and creditors would agree to roll over debtors' debt.

The underlying motivation for this proposal is the belief that, in the past, the international community has focused too much on finding solutions for countries facing debt sustainability problems (countries that cannot service their debts without compromising other basic socio-economic indicators) and too little time on the much larger group of countries facing liquidity constraints (countries that cannot roll over their debts).

While the Bridge proposal is significant, its practical implications for developing countries remain unclear. One concern is how credit rating agencies could perceive it. These agencies have explicitly indicated that maturity extensions could be viewed as a trigger for credit rating downgrades. This perception could deter nations from seeking assistance out of fear that their credit rating could be downgraded, making it harder for them to borrow in the future.

The Bridge Program aims to provide short-term relief for countries facing liquidity issues, but its practical implications raise concerns about potential credit rating downgrades, among other issues.

Countries engaging with the initiative might end up accumulating more senior debt-with a higher repayment priority-making future restructuring even more difficult. The fear is that the new funds might benefit private creditors rather than promoting economic resilience or investing in sustainable development.

What Are Some Alternatives to These Proposals?

An alternative to the Bridge proposal is the Debt Relief Initiative for a Green and Inclusive Recovery (DRGR). The initiative is akin to the Bridge Program, proposing a tri-partite deal: bilateral and private creditors provide debt relief, multilateral lenders commit new financial support, and the debtor commits to a country-led, credible multi-year program for economic recovery and green growth. Unlike the Bridge Program, however, the DRGR could also be applied to countries facing debt sustainability problems.

This proposal is anchored by enhanced Debt Sustainability Analyses (DSAs). DSAs are evaluations provided by the IMF and World Bank that assess a country's ability to manage its debt. In the context of the DRGR, such evaluations would be reviewed to assess not only the capacity of a country to repay its debt obligations but also a country's ability to finance critical investment needs, such as climate adaptation or social services, and repay its debt without compromising sustainable development that is environmentally sustainable.

Unfortunately, including investment needs for climate and development in DSAs, as proposed, is anything but straightforward in practice. Assessing these needs would necessitate a transparent and multistakeholder process that includes input from the parliament and civil society organizations for debtors, creditors, and international financial institutions to agree on the financial requirements needed to meet them. In this regard, fostering multistakeholder forums is a critical step, as they increase transparency around a country's investment needs and debt sustainability. And while various stakeholders might still contest the results of the process based on their interests, transparency can make it harder for them to ignore established norms and dispute common sense.

The Debt Relief Initiative for a Green and Inclusive Recovery (DRGR) aims to integrate environmental and social investment needs into debt assessments, but achieving transparency and stakeholder consensus remains a complex challenge.

It is crucial to note that going forward with the DRGR proposal would imply amending the Common Framework for Debt Treatments to incorporate these enhanced considerations and that re-opening the discussion on previously agreed elements of the Common Framework is undesirable from a political perspective. Indeed, several G20 members have indicated they would contest previously agreed elements, which could lead to a regression in established norms rather than progress.

What Is the Next Step for the GSDR?

Members of the GSDR will likely meet at the upcoming IMF/World Bank Annual Meetings in Washington, D.C., in mid-October, where they are expected to publish a progress report analogous to the one published during the Spring Meetings in April. The Bridge proposal is likely to continue being discussed, especially by the G20, where revisions to the proposals are being considered.

While it will be difficult to get a revised version of the Bridge proposal adopted by consensus by the G20, the likelihood is higher than amending the Common Framework for Debt Treatments, something the DRGR initiative requires.

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