Sovereign bonds

Le Plateau, the central business district of Abidjan, the economic capital of Côte d'Ivoire. The headquarters of the African Development Bank is visible in the distance. Photo: Wikimedia Commons Covid-19 is creating Sub-Saharan Africa’s worst social and economic crisis since World War II. The region’s economy is set to contract by 1.6% in 2020, its worst performance on record. Global merchandise trade could shrink by 13-32% this year, which will hit Africa hard. And the World Health Organization warns that the number of coronavirus cases in Africa could increase to 29-44 million in the first year of the pandemic, with up to 190,000 deaths. If these predictions turn out to be accurate, the pandemic would overwhelm African countries’ health systems, devastate their economies, and threaten millions of people with unemployment, hunger, and homelessness. Mindful of these potentially horrific consequences, 18 African and European leaders recently warned that “only a global victory that fully includes Africa can bring this pandemic to an end.” Among other measures, they called for “an immediate moratorium on all bilateral and multilateral debt payments, both public and private” until the pandemic has passed. The international community is beginning to respond. At their recent virtual meeting, G20 finance ministers and central-bank governors agreed to suspend debt-service payments by the world’s poorest countries on all official bilateral credits from May 1 until the end of 2020, and left open the possibility of extending the repayment freeze. Some G20 governments are also contributing to efforts to help the poorest countries meet their obligations to the International Monetary Fund. The Institute of International Finance, which represents over 450 of the world’s largest financial institutions, has expressed support for a temporary debt-service moratorium for poor countries. But neither the IIF nor its members have specified the terms on which they would implement such a suspension. Moreover, they have given no indication of whether they would commit to suspend trading in poor countries’ debt instruments during the crisis. This is a problem, because some $117 billion of Sub-Saharan African countries’ roughly $150 billion in long-term debt to private creditors is in the form of bonds. Debtor countries owe the bondholders about $8 billion per year. And markets are clearly not confident that these countries will meet their obligations: Angolan and Zambian sovereign bonds were recently trading at around 35 cents on the dollar, for example. This situation is ripe for so-called vulture funds to exploit. These speculators have previously made enormous profits by buying deeply discounted debt in the expectation that they will be able to demand full repayment from debtor governments – and to sue any that demur. Vulture funds have used this strategy against about a dozen African countries and a number of other sovereign debtors, most notably Argentina. Some countries have passed laws to discourage such activity. But these funds are adept at using their bond holdings to intimidate sovereign borrowers into prioritizing the debt owed to them over other obligations, including to their own citizens. To mitigate the risk of such speculation, the international community should establish a Debts of Vulnerable Economies (“DOVE”) fund. The fund could be based at an African institution such as the African Development Bank, but should be managed by an independent board representing all stakeholders, thereby demonstrating its independence from both debtor countries and creditors. Governments, international organizations, foundations, financial institutions, private firms, and individuals could all contribute to financing the fund. For example, rich countries could donate a portion of their unused Special Drawing Rights to the IMF, which would convert them into foreign exchange that it then contributed to the DOVE fund. The IMF membership could also agree to sell part of the IMF’s gold reserves, currently valued at $138 billion, to finance the fund. The DOVE fund would have two main roles. First, it would buy African sovereign bonds at market prices (that is, with the current steep discounts) and promise to implement a repayment standstill on this debt until the global health crisis abates. The DOVE fund would also pledge to work with African governments to ensure that their debt does not unduly burden their economic rebuilding efforts when the global economy starts to grow again. It would stipulate that any future debt renegotiations be consistent with all applicable international standards, such as the United Nations’ Guiding Principles on Business and Human Rights, Principles for Responsible Investment, and Principles on Promoting Responsible Sovereign Lending and Borrowing. These measures, and their possible positive impact on African sovereign-debt prices, should help to deter speculators. Second, the DOVE fund would urge all other private-sector creditors to commit to a standstill on African debt payments and trading for as long as the crisis lasts, and, on a case-by-case basis, to consider renegotiating this debt thereafter. After all, leading financial institutions such as BlackRock, and influential groups including the US Business Roundtable, have recently argued that firms (including financial institutions) should serve the interests of all their stakeholders, instead of putting shareholders’ interests first. Financial institutions’ stakeholders include their borrowers and innocent third parties – such as citizens – who are affected by their actions and decisions. Moreover, many of the institutions that hold African country debt have environmental, social, and human-rights policies requiring them to comply with all relevant international standards. The Covid-19 pandemic threatens to make African countries even more vulnerable to aggressive sovereign-debt speculators. But the crisis also presents financial institutions with an opportunity to change the way they do business and play their part in helping the continent to recover. Daniel D. Bradlow is Professor of International Development Law and African Economic Relations at the University of Pretoria. Copyright: Project Syndicate, 2020. www.project-syndicate.org

Sovereign bonds

Coronavirus profiteers: Protecting Africa from vulture funds