Debt indebted countries: this new clause of the G20 initiative which worries private creditors (Moody’s)

After Zambia (Ca, stable), Ethiopia (B2, negative) and Chad entered into negotiations with official and bilateral creditors, Moody’s released a report this week assessing the potential implications of the G-20 Common Framework’s credit. * in a context of persistent uncertainty on how it will be implemented. “Given the continuing uncertainty over how the common framework will be implemented, and in particular how private sector involvement will or will not be defined,” Moody’s does not formally determine that the engagement of a countries in the G20 initiative will de facto increase the risks of its private creditors.

However, continue Moody’s analysts, “we will continue to monitor negotiations between participating sovereigns and official creditors for any sign that these risks have reached a level inconsistent with current ratings.” At first glance, access to the common framework could imply an increased risk of loss for private sector creditors. According to the G-20 announcement in November last year, any debtor country signing a Memorandum of Understanding (MoU) with participating creditors under the Common Framework “will be required to ask private creditors for at least treatment. as favorable as that agreed in the MoU ”. This is apparently a stricter requirement than that of the original DSSI modality sheet, which only stated that private creditors would “be called publicly to participate in the initiative on comparable terms.” However, the common framework has not yet been tested and the practical implications of the more engaging terms in the revised version are no clearer than those in the earlier version.

At this point, Moody’s notes, it seems unlikely that the goals of the various parties have changed significantly. Public sector creditors continue to insist on the comparable treatment of all creditors, including those in the private sector. Borrowing countries remain concerned about the longer term ramifications of private sector lender participation and market access. Private sector creditors, meanwhile, remain divided on how to contribute to the initiative. To date, these conflicting goals have argued against the inclusion of private sector creditors in DSSI’s debt relief.

The conclusion of the debt sustainability analyzes that the Common Framework requires as a precondition for access to the expanded IDSS may influence the outcome. But, as before in the DSSI context, bilateral negotiations are more likely to be critical. “For now, we continue to assume that an application for Common Framework relief – such as subscription to DSSI – need not in itself necessarily result in losses to private creditors,” Moody’s says. However, the US rating agency concludes, “we will be following the negotiations closely in this case and in all subsequent cases. We may submit ratings for review for demotion to signal our intention to do so. Any indication in individual cases that private sector involvement is being considered would likely result in lower scores commensurate with the risk of losses ”. To be continued.

* The G20 initiative is called the Debt Service Suspension Initiative (DSSI). Or the Debt Service Suspension Initiative.

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