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Passing the buck on debt relief: How the failure of the private sector to cancel debts is fueling a crisis across the developing world

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The coronavirus pandemic is fast pushing developing countries toward a debt crisis that would be catastrophic for their fight against poverty, with the likelihood of multi-billion-dollar defaults that will hurt the entire global economy, warned Oxfam ahead of the G20 Finance Ministers’ meeting this weekend (July 18-19).

The G20’s temporary suspension of debt in April, while welcome then, is woefully inadequate now to stave off the worst economic effects of the pandemic. Crucially, it fails to mandate any action from private creditors or multilateral development banks such as the World Bank.

73 of the world’s poorest countries are eligible to join the Debt Service Suspension Initiative (DSSI) and so far 41 have applied, potentially saving them up to $9 billion in 2020. However, new research published today by Oxfam, Christian Aid and Global Justice Now reveals all 73 countries will still pay up to $33.7 billion in debt repayments through the end of the year, or $2.8 billion per month. This is double the amount Uganda, Malawi and Zambia combined spend on their annual health budget.

These 73 countries still owe at least $11.6 billion (or $31.8 million a day) to private creditors, including commercial banks and investments funds, and roughly $13.8 billion (or $38 million a day) to multilateral institutions this year. The World Bank alone is owed $3.77 billion (or $10 million a day) this year.

“The global economy has been hit harder by the coronavirus than the already dire predictions we saw in April ―the G20 Finance Ministers have the mandate to avert an impending catastrophe for hundreds of millions of people. They must make the DSSI legally binding to cancel all debt payments, including private and multilateral, through the end of 2022 and also include middle-income countries. If not, they will fail to protect humanity from its worst economic crisis since the Second World War,” said Chema Vera, Oxfam International’s Interim Executive Director.

“An eight-month freeze on bilateral debt alone does not come close to freeing up enough cash or time for the world’s poorest countries to cope with the pandemic and its effects. Money saved on bilateral debt should not have to go straight to other creditors like rich private banks and bondholders. Countries need this relief for free healthcare for all and cash grants to poor households. The World Bank needs to step up and provide debt relief, at the very least through ensuring an initial debt standstill.”

The G20 should also protect countries from credit rating agencies threatening to downgrade their ratings and making debt refinancing more expensive. Countries including Ghana and Kenya, which could save $354 million and $802 million respectively in bilateral debt repayments, are fearful of joining the initiative for this reason.

“The US and UK most of all should urgently pass new laws to stop their private lenders and predatory vulture funds from gouging developing countries and suing them for defaulting on their debts. Private creditors should not be plundering the poorest countries in a pandemic,” said Vera.

Some middle-income countries are excluded from current debt relief efforts despite being on the brink of default. Huge fiscal spending, plummeting revenues and no ability to borrow to fill this gap could trigger a domino of sovereign defaults ―Argentina, Ecuador and Lebanon have already defaulted this year― that could roil the global economy and derail shaky recovery efforts. No country is immune to the spread of financial crises across borders.

Lebanon’s public debt is more than 170 percent of its GDP, its foreign currency reserves are critically low, and it is unable to pay back $4.4 billion in Eurobonds due in 2020. It defaulted on its sovereign debt for the first time ever in March. The country could be sued by bondholders if they refuse to cooperate in debt restructuring. Lebanon’s main coronavirus hospital was recently forced to close its operating rooms due to power cuts, and food prices there are soaring. The World Bank warned last November, before the pandemic, that poverty could rise to 50 percent if economic conditions worsened in Lebanon.

At this stage of the crisis, there is an imperative for the G20 Finance Ministers to approve a significant general allocation in International Monetary Fund (IMF) Special Drawing Rights. If the IMF issued $3 trillion in SDRs, Ecuador would access roughly $6.2 billion worth of them, equivalent to over half of the country’s total outstanding multilateral debt, allowing it to double its health budget this year to fight coronavirus.

Notes to editors

Download 'The world needs a stimulus: IMF Special Drawing Rights are critical to containing the pandemic and boosting the world economy', a paper on SDRs recently published by Oxfam America and the Center for Economic and Policy Research.

In April, the World Bank’s Development Committee and the G20 Finance Ministers endorsed the Debt Service Suspension Initiative (DSSI), which allows 73 low-income countries eligible to the Bank’s International Development Association (IDA) to suspend principal or interest payments on their debts to G20 countries from May 1 through the end of 2020.

Since April, the IMF has also approved several months’ worth of IMF debt service relief for 27 of the world’s poorest countries through its Catastrophe Containment and Relief Trust (CCRT) Fund, worth approximately $243.6 million. Oxfam estimates at least $250 million more is available for approval.

Virtually all international debt contracts are owed under UK or New York law. Roughly 90% of the 73 eligible countries’ government external bonds are governed under English law, while New York is a popular jurisdiction for Latin American and Caribbean sovereign debt contracts. In 2010, the UK passed the Debt Relief (Developing Countries) Act which prevented countries from being sued by creditors who were not participating in a previous round of debt relief.

Ecuador, one of the countries hardest hit by the pandemic in Latin America, reached a deal in April with bondholders to delay $800 million in interest payments through August to fight the coronavirus ―only for S&P Global Ratings to downgrade its sovereign credit ratings. In July, it reached a provisional agreement with some of its largest bondholders to restructure $17.4 billion in outstanding debt.

Argentina has failed to pay around $500 million in interest on already delayed bond coupons in May while South Africa, with an all-time high external debt of $185 billion, is facing a debt crisis in its worst economic recession in 90 years.

Contact information

Spokespersons are available for interviews in English, French and Spanish.

Annie Thériault in Montreal, Canada | annie.theriault@oxfam.org | +51 936 307 990

For updates, please follow @Oxfam