Debt Transparency in Developing Economies
Debt Transparency in Developing Economies
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- 00:11 [Indermit Gill] Hello, everyone. Welcome to this discussion.
- 00:18 My name is Indermit Gill, and I work in the growth, finance, and institutions practice
- 00:22 group for The World Bank. Well, we have a real treat for you today. Our president, David Malpass,
- 00:27 will lead a discussion with a star-studded panel. And it's fitting that David leads
- 00:32 this discussion because he's been a tireless and vocal leader on this issue of debt transparency
- 00:40 since he became president two and a half years ago. It's fitting also that we'll have
- 00:44 four top notch experts on the panel, and that David will actually introduce them...
- 00:55 Why this issue is so important. And this is an easy job for me because our macroeconomics global
- 01:01 practice has just published an excellent report called Debt Transparency in Developing Economies.
- 01:06 And I can say it is excellent because I cannot take any credit for it.
- 01:10 The credit should go to David for championing the calls and to Marcello Estevão, Dorcha Domelin,
- 01:16 Diego de Verti, and the team in the macroeconomics global practice for actually producing the report.
- 01:22 And we released the report yesterday and you can easily find it if you just Google, "Debt
- 01:27 Transparency in Developing Economies." So what I want to do now is to give you a three-minute
- 01:32 summary of the report, both as an ice breaker and as an appetizer, because we are hoping that
- 01:37 you will read that report. And like I said, it's excellent, and it's excellent for three reasons.
- 01:42 So first it is excellent because it has some startling statistics that'll
- 01:46 make you sit up and pay attention. So I'm going to cite just a few.
- 01:50 The first one is that 40% of low income countries have not published any sovereign debt data during
- 01:56 the last two years. The second one is that public debt data, when reconciled, have sometimes shown
- 02:03 huge discrepancies of up to 30% of GDP. The third one is that 15 low income countries
- 02:10 have collateralized debt, but no details of the terms are published. And this can often
- 02:17 lead really quickly to debt distress when some of this information actually comes in view.
- 02:26 So for example, in 2016, when loans totaling more than a billion dollars was suddenly revealed in
- 02:34 Mozambique, that was nearly 10% of the country's GDP, it plunged the country into debt distress.
- 02:43 So we have about 12 countries that are now in debt distress, and about 44 countries that are
- 02:49 at high risk of it. We don't know how many of these would actually be in distress if all
- 02:54 of their debts were revealed, right? Now, poor countries have huge financing needs,
- 02:59 and these will be met mostly through debt. So by one measure, these financing needs total nearly
- 03:04 half a trillion dollars between 2023 and 2025. Without debt transparency, such big sums mean
- 03:13 big dangers, so that's the first reason. The second reason the report is excellent because
- 03:18 it outlines a very practical way to think about debt transparency. It says that debt transparency
- 03:24 has three aspects. The first one is transparency in operations. Second is transparency in legal
- 03:30 management. And the third one is transparency in reporting, especially the third one is very
- 03:34 important. And there are three parties that can make debt transparent or keep it obscure.
- 03:40 The first one, of course, are borrow governments and state own firms, both at the center
- 03:44 and subnational levels. The second has to be the folks who actually give this debt. These are the
- 03:51 creditors, both public and private. And then the third one are international financial institutions
- 03:57 like The World Bank and the IMF. Now finally, the report is excellent because,
- 04:04 for the first time, it proposes the high and medium and low priority measures that borrowers,
- 04:10 governments, and IFIs can take. So I will just list the five or six high priority measures,
- 04:21 some to be taken by borrowers, and three to be taken by IFI.
- 04:25 So to increase transparency in debt reporting, governments should publish core public and
- 04:31 publicly guaranteed debt statistics regularly. They should also limit and
- 04:36 define the scope of confidentiality clauses. To increase transparency in debt operations,
- 04:43 borrowers should adopt market-based issuing mechanisms for domestic debt
- 04:48 and adopt strict criteria for approving resource backed loans. To increase transparency in debt
- 04:55 management, governments should define criteria for authority to contract debt or to issue guarantees,
- 05:01 and specify responsibilities of units in charge of executing
- 05:06 debt operations, and publish a list of allowed instruments, transactions, and funding sources.
- 05:13 By the same token, what IFIs can do is to consolidate that debt databases and support
- 05:20 the implementation of integrated debt recording and management systems. It's a big agenda,
- 05:27 and I've talked for a long time. But because it's a big agenda, I'm going to hand the mic over to
- 05:32 the big guys. So over to you, David. [David Malpass]
- 05:35 Thanks very much, Indermit. Good summary, and it's an important report. We've got a panel,
- 05:41 a great panel. Carmen Reinhart, chief economist to The World Bank group, my colleague. Also,
- 05:46 Lee Buchheit, who is one of the world's most experienced sovereign debt restructuring experts.
- 05:52 Joyce Chang, global chair of research at JP Morgan. And Paul Gruenwald, chief economist at S&P
- 05:59 Global Ratings. Just as a start in, I want to make the point that the world actually
- 06:05 is very challenging. I'm just back from the G20 Leaders' Summit in Rome. And I made the point,
- 06:11 as others did, that we faced not only the pandemic, but also rising inflation in a lot
- 06:18 of countries. The supply chain challenges, the energy crisis in Europe, the rise in oil prices
- 06:24 and other energy prices that's putting inflation into developing countries. Very challenging
- 06:30 from a debt standpoint in developing countries. That's the focus of our conversation today.
- 06:35 The World Bank is deeply engaged in the issues of debt in developing countries
- 06:41 with the purpose being to try to have more growth rates in developing countries, faster growth
- 06:48 and better connection between investments and the debt that goes along with those investments. This
- 06:55 is made more challenging by the size of the debt. We did a report a month or so ago that showed $860
- 07:03 billion of debt in the low income countries. So even the poorest countries in the world have $860
- 07:10 billion of debt, external debt, not counting their bank debt that the governments take out
- 07:16 inside their own countries. This is giant. And the report that just came out yesterday shows this,
- 07:22 as Indermit was describing, 30% hidden debt, if we want to call it that. Or debt that's not really
- 07:28 fully recorded in the various statistics that are kept track of. This is at a time when the world,
- 07:34 many of the countries, and Joyce was telling our group just before
- 07:38 we came on here, that there are rate hikes in quite a few of the developing countries already.
- 07:43 So this puts added strain on the economic outlook, but it also means that countries are able to begin
- 07:51 adjusting to the new inflation environment that's out there. So I hope what we can do
- 07:58 to today is focus on debt transparency, whether it's important, what the aspects of that are, and
- 08:07 how the debt challenge can work its way through the system over the next five years. We're all
- 08:13 trying to avoid a lost decade from the standpoint of debt. So with that, let me
- 08:20 go first to a question to Joyce. As I mentioned, Joyce is Global Chair of Research at JP Morgan,
- 08:28 and a friend for a long time, and engaged daily in markets. So how do you think about transparency?
- 08:37 Is it important as you analyze the prospects for a country? And this idea that there might be 30%
- 08:44 more debt than is actually being recorded? How does that affect your thinking about various
- 08:49 markets? Thanks for joining, Joyce. [Joyce Chang]
- 08:52 No. Thank you, David, for having me. And it's great to be with just so many experts who've
- 08:56 looked at this topic. I mean, the transparency is really important to the private sector. And
- 09:01 I think one of the issues when the common framework was rolled out was that there was
- 09:06 a sense that there was a lot of stalling and no information sharing. And that made the whole
- 09:11 discussion about voluntary mechanisms, I think, very hard for the private sector to understand.
- 09:17 So look, the private sector has obligations to its shareholders, its investors, on the transparency.
- 09:25 And a lot of the questions that we will get is, how do we aggregate the different categories of
- 09:30 debt? The bilateral creditor debt, the private sector debt, the contingent liabilities,
- 09:36 where is there an implicit government guarantee as opposed to an explicit government guarantee?
- 09:42 And then, with every sovereign crisis, it usually emanates from the banking system,
- 09:47 so an understanding of that. There's also a whole focus on quasi sovereign debt, which is sometimes
- 09:55 corporate debt. But there's an implicit government guarantee. And we've seen these numbers really
- 10:00 balloon. We've had record debt issuance from the sovereign and on the emerging markets, corporate
- 10:08 quasi sovereign side, during this pandemic because of the low interest rates. I mean, last
- 10:13 year you had 230 billion of EM sovereign and debt issuance, more than 500 billion of EM corporate
- 10:19 debt issuance with a good component of that that's quasi sovereign. So I think, for a country to be
- 10:25 investible, you need the transparency and you need to have the ways in which you can actually
- 10:30 understand the different categories of debt and what the government could be obligated to
- 10:36 really implicitly back at a time of crisis. [David Malpass]
- 10:40 Thanks. And I hope we can have a round table kind of this panel. Let me turn to Lee, or
- 10:47 I'll preface. Some of the terms that I hope people will use are collateralized debt. So that means,
- 10:53 if savers of the world lend to a government or even to a, I guess, quasi sovereign debt and a
- 11:04 state owned enterprise, and requires that there be collateral set aside in the form of actual
- 11:10 products, it's hard to know the relative price of the various items. And it's also very hard to
- 11:18 then restructure the debt if the country runs into sustainability problems. And that is exacerbated
- 11:29 by nondisclosure clauses if people can't see inside the contract. So, Lee, will you give us a
- 11:36 briefing on these? And maybe ask a question to Joyce, if you want to. However we want to work
- 11:42 it as a panel. Thanks, Lee. [Lee Buchheit]
- 11:44 Yes. Thank you, David. And wonderful to be with you folks. One of the extraordinary statistics
- 11:51 in this report was that 10% of Sub-Saharan African debt incurred recently has been of
- 11:59 the type you described, collateralized. And it very often is not what you would think
- 12:10 the connotation of the word collateral brings, that is a pledge of an asset.
- 12:15 These transactions can be and are structured as, for example, forward sales of a primary commodity,
- 12:26 so that the lender, quote unquote, buyer, will argue that it isn't debt at all. It should not
- 12:35 therefore be restructured in connection with the country's debt, maybe not even reported
- 12:40 as debt. And yet it has the practical effect of that.
- 12:45 Traditional repos are economically the equivalent of secured borrowing. It has several implications
- 12:56 to the extent that the country has allocated a significant portion of its future revenue
- 13:06 toward the repayment of one creditor. It follows that that revenue is not
- 13:12 going to be available for all the others. And therefore, anyone lending on an unsecured basis
- 13:19 to that sovereign is probably doing so without a full understanding of the debt servicing capacity
- 13:30 of the sovereign in the future. That will result, at the very least, in mispricing of the debt.
- 13:38 It also renders the restructuring of that debt stock particularly difficult because the
- 13:48 secured lender, or the buyer, the future buyer of the commodities, may well argue.
- 13:56 They have a security interest governed by the laws of England or New York. And they can always go and
- 14:04 foreclose on that. And therefore, they must be exempted. So this problem, to the extent that
- 14:12 it is growing in significance, and it appears to be growing in significance, represents, I think,
- 14:20 a serious risk to the system. [David Malpass]
- 14:24 Thanks. Yeah. So debt for the low income countries is up 12%, even though
- 14:31 there were two major initiatives by the G20 to try to provide debt relief, the DSSI
- 14:37 and the common framework. So DSSI is debt service suspension initiative that was invoked in 2020,
- 14:48 but didn't have as broad a coverage as had been sought. And now the common framework, which
- 14:53 is being applied now to Chad, Ethiopia, and Zambia, we'll come back to those in a minute,
- 14:58 but I want to pick up on the point that Lee just made and ask Paul,
- 15:05 S&P, I know you're chief economist, Paul. But S&P does ratings of countries and of bonds.
- 15:13 That's the way I think about it. And how does it do that if it's the case that,
- 15:20 as the report shows, that for some countries it might be 30% more debt than has actually been
- 15:25 disclosed? And even for those that disclose debt, which are not that many or, I mean, which are not
- 15:31 all the countries, there are nondisclosure clauses on some of that debt. So even of the
- 15:38 amounts of debt that are disclosed, sometimes the terms and the covenants are not disclosed. So how
- 15:44 do you handle that in S&P? [David Gruenwald]
- 15:46 Well, first, hi, David and everyone. Thanks for inviting me to the panel. Let me start
- 15:52 out by saying that S&P Global is 100% behind these initiatives to improve the transparency of debt,
- 16:00 but you're right. We have a sovereign team. The sovereign team currently has 137 sovereign
- 16:06 ratings outstanding. So we're missing kind of the lower end of the tail. So perhaps part of
- 16:10 this problem is not in the rated universe. But just as a reminder to everyone, the idea behind
- 16:18 a credit rating is not to predict a default. It's our opinion on the ability of the borrower
- 16:24 to repay their debts in full and on time. But you're absolutely right about some countries
- 16:31 not having a full set of data, that would be the ideal state. But our sovereign team, for the 137
- 16:39 countries that we do rates, they're comfortable with the information that we have. And they think
- 16:44 that's sufficient to determine a rating. When the committees get together
- 16:48 and do a sovereign rating, they look at a number of factors. And if they see that they are
- 16:53 inconsistencies in the data, the errors and omissions. Large errors and omissions is one,
- 16:59 or maybe there are inconsistencies or historical patterns that don't always make sense.
- 17:05 These rating committees are allowed to make an adjustment to the ratings,
- 17:09 downward in this particular case. So there are a few channels through which they can do that.
- 17:14 There's a fiscal pillar, there's an institutional pillar, and there's also some discretion around
- 17:20 the final determination of the rating itself. It's not a totally mechanical process, but the
- 17:26 sovereign teams are aware of the issue. And this lack of transparency is embedded in the ratings.
- 17:34 And it tends to be correlated with the lower credits. The higher rated credits tend to have,
- 17:38 not surprisingly, a higher level of debt disclosure and a higher level of comfort that
- 17:45 we're getting a full story. And that deteriorates a bit as we go down the spectrum. But again,
- 17:51 all the initiatives in the report and the things that we're going to talk about today
- 17:55 that would enhance debt transparency, that will help us do 0ur job better. And that will help the
- 18:01 markets as well. So back to you, David. [David Malpass]
- 18:05 A core problem I'll mention, and then I'll come to Carmen. A core problem is, in a lot of debt
- 18:12 around the world, there's a bankruptcy process that is legislated within a country. And so when
- 18:20 a debtor is unable to pay, there's a prescribed process that the creditors can go through to
- 18:27 both share information and then decide who's going to take the losses. And they fight about it, but
- 18:32 they assess the situation. Whereas in sovereign lending, there's not the equivalent. And so
- 18:41 one of the things that is complicating this, I think, is that sovereigns are fully... the people
- 18:48 of the country are fully committed to paying all of the debts that are incurred by the government
- 18:53 of that country forever with no process to restructure it or force a change. And that, maybe
- 19:01 everyone can correct me in that perception, but to me then that means that if I'm a lender and
- 19:08 I'm lending only a small amount to a country that has big problems elsewhere, I'm pretty assured of
- 19:15 getting paid because I have the upper hand in the legal structure. If I take it to court in London
- 19:21 or in New York, I'm going to win as a creditor because that's just the way the system works.
- 19:27 But that's a background, let me turn to Carmen for both comments and questions to the panel.
- 19:40 [Carmen Reinhart] Thank you. Thank you all for a very
- 19:46 insightful discussion. And I want to follow up on something Paul said. The issue of hidden debts
- 19:58 is not new and, Paul, I would say it's certainly, as this wonderful report highlights, it's
- 20:06 primarily an issue for many of the emerging and lower income countries. But it's not
- 20:13 unique to them. I mean, certainly the Greece Goldman case a few years back on hidden debts
- 20:23 was a major surprise. And over the last decade or so, the issue of hidden debt has partially also
- 20:37 grown enormously because non-Paris Club creditors, the largest of these is China,
- 20:46 increased in importance. Now that's official lending, but nonetheless it is adding to the
- 20:52 debt servicing ... To the debt and debt servicing of a particular country.
- 21:00 And some of that debt has been restructured repeatedly. How does
- 21:08 S & P deal also with a higher incidence of these restructurings? And, as David mentioned, since
- 21:20 last year the DSSI, we learned that, for example, the sovereign debt... I mean the debt of the China
- 21:33 Development Bank is considered private debt, which would be in the domain of credit rating agencies,
- 21:38 so there would be a private creditor. So how would you say that ratings have adjusted to deal these
- 21:49 change landscape? [David Gruenwald]
- 21:51 Yeah, Carmen, I'm going to get out of my pay grade pretty quickly here because I run the economics
- 21:56 team and not the sovereign ratings team. But yeah, you're right, this is a challenge. I mean,
- 22:00 we've got a lot of debt that's quasi-public debt, it might be a non-government organization to a
- 22:06 non-government organization, or it might be a state enterprise to another state enterprise
- 22:11 across border. But it's something that our sovereign team has to deal with. As I said,
- 22:17 there are ways to adjust the rating up or down if we're not happy with the transparency
- 22:22 or the consistency of data or anything else. We do rate a large number of the bigger EMs,
- 22:28 not the tail, because we're missing about 60 or 70 countries globally. But that's something
- 22:34 that we try to put into our criteria and the sovereign team tries to keep up with that. I mean,
- 22:40 for the details I can maybe get back to you on that, but the sovereign teams are fully aware
- 22:45 that a lot of this debt is not directly on the sovereigns balance sheet and it may come from
- 22:51 quasi-sovereign or other creditors. But to the extent possible, that is incorporated into the
- 22:55 rating that we're publishing. [David Malpass]
- 22:59 Thanks, and so, I'll ask us to come back in a little bit to the Common Framework and to China,
- 23:06 the magnitude of the China debt. I want to ask Lee if he has reflections on what we've already
- 23:11 been talking about and also any suggestions or corrections to the way I described the sovereign
- 23:20 process. So one of the things we're dealing with is this fundamental gap in the global
- 23:26 system for how do you deal with a country that has unsustainable debt. There's not really any
- 23:33 process to do that so we're always ad hoc, one country at a time, and that's a very expensive
- 23:39 process. So Lee, correct me in perception and also ask... Or let's go on from there.
- 23:47 [Lee Buchheit] Okay. I would amplify what you've said,
- 23:52 David. You described half of it. You said that sovereigns are not subject to a bankruptcy code,
- 24:00 not their own, not anyone else's, and that is true. It follows from that, to the extent that
- 24:06 they have governed their debt instruments by a foreign law, like New York or England.
- 24:12 If those debt instruments aren't paid, the creditor can get a judgment against them.
- 24:17 That is true. But at that point, the leverage usually shifts back to the sovereign
- 24:24 because that judgment will convey an emotional satisfaction to the holder, but not a financial
- 24:31 satisfaction, unless the sovereign pays it voluntarily or the creditor can find an asset
- 24:40 outside of the debtor country that it can seize in order to pay itself. And typically, there
- 24:48 are few such assets in the name of the sovereign itself, the republic, not state owned enterprises,
- 24:57 outside of the jurisdiction of the sovereign. And we have seen this play out again and again,
- 25:03 David, perhaps most poignantly in the 15 years of litigation that followed the Argentine default in
- 25:10 December of 2001. Where you had some of the most sophisticated and aggressive,
- 25:16 litigious, high testosterone hedge funds pursuing a sovereign around the world,
- 25:23 looking for assets in an effort to pay themselves. And that effort was, to a very large extent,
- 25:31 unavailing. So there is leverage on both sides. The creditors can get judgements and there's very
- 25:39 little that the sovereign can do to stop it. But once the judgment has been issued, satisfying that
- 25:47 judgment becomes a major problem for the creditor. And candidly, a recognition of this situation
- 25:58 is the chemistry, is the basis for consensual sovereign debt workouts.
- 26:06 Both sides are vulnerable in the process, and therefore in truth, neither side has a good option
- 26:13 other than to negotiate their way out of the problem. They cannot litigate their way out.
- 26:18 [David Malpass] Got it. Let's talk about that in the
- 26:20 context of the Common Framework in a minute. Let me turn to Joyce on that point that Lee is making,
- 26:31 that there's a practicality... And I wonder if that's how you perceive it?
- 26:36 Are there any countries, I know you're watching China very carefully for its own internal debt,
- 26:41 but what about Argentina that is working its way through a recent crisis. How do you think of
- 26:54 sovereign debt as far as the safety of it? Thanks. [Joyce Chang]
- 26:57 No, no, thanks very much, David. And just a couple comments on what Lee had to say and also on
- 27:02 the collateralized debt as well. So look, I often will hear, we're very disappointed
- 27:09 in the private sector, we want the private sector to do more, and these are empty statements. Look,
- 27:15 I think it's too much for the private sector to ask to be in the negotiating room, but
- 27:20 they should be given the information upon which bilateral creditors have constructed
- 27:25 their debt treatment if you're going to expect comparability of treatment to work. They don't
- 27:30 necessarily have to be at the table because that makes a large political statement, but they have
- 27:35 to be given the information and asked about their views. And I think this was some of the
- 27:40 initial problem with the Common Framework, but I wanted to just say a few things on
- 27:47 the collateralized debt and also on the China Development Bank that Carmen had brought up.
- 27:54 Look, I think there is room for innovation. I mean, JP Morgan now allows credit enhanced bonds
- 27:59 to be included in the EM bond indexes. But Lee is absolutely right. When we conceived of credit
- 28:06 enhanced bonds, we really did think back to the days of the Brady bonds, where it was treasury
- 28:11 collateralized. I mean, the whole issue was, is there a way that you could actually use
- 28:16 official creditor resources and leverage that more? Because the official creditor resources
- 28:21 are still relatively small to EM sovereigns raising 230 billion dollars in the international
- 28:27 capital markets. Now that's completely different than forward sales of a commodity
- 28:32 as collateral. So something like that would not go into a JP Morgan index, but the question on
- 28:38 collateralized instruments was, is there a way that you could use official credits,
- 28:43 and even things like XM credits, we have a development financing group that's looked at that.
- 28:47 And could you require certain things, like ESG sustainability commitments,
- 28:52 in return for credit guarantees? That's more the way that I would conceive of the collateral, as I
- 28:57 totally agree with Lee, that some of these other mechanisms that they're looking at.
- 29:01 To me, they raise real questions on who bears the responsibility and the transparency and how
- 29:12 you actually can enforce some of this. And then, I hear oftentimes also from official creditors, a
- 29:19 lot of discussion on these contingent instruments. And I do think academics really love these because
- 29:26 it's theoretical economics, it makes sense, and there's this automatic factor in it. In practice,
- 29:31 I think that it's a lot harder to actually put that into place. So the official creditor
- 29:36 enhancements is something that stands out. Look, I think that Carmen brings up the elephant in the
- 29:41 room on the Common Framework. I mean, is this really all about China as the largest creditor
- 29:48 to many of the emerging markets countries? And this will debate on whether China Development
- 29:53 Bank is official or commercial. That's kind of a travesty, in a lot of ways, as a lender. And
- 30:00 I mean, the Common Framework was meant to overcome these issues, but in some ways the question has
- 30:06 been asked, does China really prefer bilateral negotiations when they are the largest creditor?
- 30:12 Was the lack of clarity, in some ways, meant to cajole China in this? We've just been going
- 30:20 through the numbers for China and what they call the private sector debt there is 232% of GDP now.
- 30:28 So is that private? Is it quasi-sovereign? Is it really government debt? So I think that China's
- 30:34 really the elephant in the room, given the role that they have assumed for so many of these low
- 30:39 income countries as the biggest ... As being really, a lot of this debt really is something
- 30:49 that China has a key role in. [David Malpass]
- 30:54 You gave us a lot to chew on there. Okay, so one background for people is, we've been talking
- 31:00 about official debt. This is the debts of various government entities around the world lending into
- 31:08 sovereign situations, or even private situations, in developing countries. Or that's the way I'll
- 31:16 use the term. And so that, historically, for I don't know, 40 years or 50 years, has been
- 31:22 rescheduled as a group by the Paris Club, which is a group of official creditors that used to be
- 31:29 the major creditors around the world. So in the Latin debt crisis, the US and Germany and France
- 31:36 and the UK and Japan were the major creditors for the Latin countries. And they could sit in a room
- 31:44 and figure out what to do to restructure the debt. Over time, China has become a much
- 31:51 bigger creditor than all of those others combined. World Bank did a report a year or a year and a
- 31:58 half ago that showed that 65% of the official credits were from China and all the rest
- 32:06 of the countries were the remaining 35%, of which Japan was one of the big ones at 15%,
- 32:14 if I recall. And so what that means is that the concept of the restructuring process has changed
- 32:21 dramatically over time as China's role became more important in that amount of debt. So that
- 32:30 was kind of background. So one of the challenges as the world looks for a process to allow debt
- 32:39 relief, reduction of debt for poorer countries or developing countries in general,
- 32:48 where the debt has become unsustainable. Meaning the creditors allowed too much
- 32:53 debt and the countries took on too much debt and circumstances changed and the country can't pay
- 33:00 it. There's not a process and so we're looking for that process. And the G20 put forward the
- 33:05 Common Framework that we've been talking about. So I wanted to ask Joyce, and then have others
- 33:11 maybe ask questions, but you mentioned the term credit enhanced bonds, which is great. And so,
- 33:16 as we talk about collateral, my understanding of the problem of collateral is it's very hard to
- 33:23 value within the structure. Meaning the country gives collateral, meaning either a right to an
- 33:29 asset, or as Lee framed it, this forward sale concept. It doesn't seem to cost the government
- 33:35 of a country much, but over the years and over the decades, sometimes these are 20 year commitments
- 33:41 by a government that is non-disclosed. So it's a secret commitment by a poor country,
- 33:47 the government of a poor country, that locks the people of the country into payments that
- 33:53 are going to last 20 years. So why would the world want credit enhanced bonds? Can I frame it that
- 34:00 way? And you make a defense and then maybe I'll bring Lee or Paul in on that. Go ahead, Joyce.
- 34:07 [Joyce Chang] That's why I'm trying to be clear that
- 34:09 on the credit enhanced bonds, I really looked at it more conceptually as whether there's a way to
- 34:15 leverage official creditor resources in that process, more so than making these forward
- 34:21 commitments for 20 years, 10 years, based on forward sales of commodities. Or even like some of
- 34:29 these GDP linked bonds where I feel like sometimes that is really brought up in academic circles.
- 34:34 I find that much harder to actually... Look, I feel like, David, you're in this environment
- 34:41 right now where you can sell practically anything. I mean, in a zero yield world right now, given
- 34:50 that you have a 1% return on fixed income bonds. So on some of these credit enhanced bonds, I think
- 34:57 there is a moment right now that you can get some of these done. How does the private sector look at
- 35:02 that? Or how would you look at it conceptually? I look at much more the Brady plan model
- 35:08 where you really did have a partnership more between the official creditor community that
- 35:12 provided the incentive for the private sector to get involved and more of the certainty.
- 35:17 So I think Lee very well points out what the problem is with the structure of some of these
- 35:22 bonds and the forward 20 years. And we see this with a lot of the GDP warrants, all of these
- 35:27 other mechanisms that were put into place. I mean, that's much harder to value going forward. It is
- 35:33 something that ... I feel like sometimes it is the economists who come up with these kinds of
- 35:40 structure because they like the theoretical economics. It makes sense. It injects an automatic
- 35:47 element into it so there isn't as much discretion, but I think that the official creditor subsidy is
- 35:55 actually something, to me, that makes the most sense. And then a way that you can leverage the
- 36:00 official creditor resources. [David Malpass]
- 36:02 Got it. Now one small point, and then I'm going to go Lee and then Paul then Carmen. One small point
- 36:08 on that, Joyce, is people look to the World Bank to provide that creditor Subsidy. And the problem
- 36:15 is, we can't price it or value it. So people are looking for first loss guarantees from the World
- 36:20 Bank. The problem is, World Bank is decidedly going to be less good at evaluating the value
- 36:27 of that credit enhancement than the private sector itself that's looking for the enhancement. So we
- 36:34 have not wanted to go in that direction in that it will end up in a mispricing of creditor. At least
- 36:42 that's the view that we have. But let me go to Lee and then Paul and Carmen on any topic. Lee?
- 36:48 [Carmen Reinhart] If I may just comment
- 36:50 on something that Joyce said. Joyce, I don't think it's just that economists are enamored
- 36:56 with state contingent contracts. The reason they write state contingent contracts is also to do
- 37:02 risk sharing between debtors and creditors, so that in bad states of nature, debtor countries
- 37:10 that are able to pay less can, under the contract, pay less. So I think, clearly your vision is
- 37:20 from the creditor side, which is perfectly understandable, but it is about risk sharing.
- 37:28 And a relevant example to COVID would be something along the force majeure, though I defer to Lee
- 37:35 on that score. [David Malpass]
- 37:37 We'll go to Lee and I'll make a principle statement. I, and the World Bank, are on the side
- 37:46 of the people in developing countries. Which is a different interest... Yeah, I mean, we're trying
- 37:51 to find a way to wed that interest with creditors. I mean, the wonderful thing in the world is that
- 37:57 there are savers who want to put money to work. And Joyce named it. They're not asking for a very
- 38:02 high return. A risk return is favorable from the standpoint of borrowers right now because
- 38:10 the interest rates are so low. We're trying to put both sides together, but with a recognition,
- 38:21 or at least our observation right now is it's not working very well at all for the people in
- 38:27 the poorer countries. And so we're trying to look for ways, and jointly, to move that forward. Lee,
- 38:34 any thoughts? And then Paul. [Lee Buchheit]
- 38:37 Yes. I think Joyce has raised the issue of what the IFIs could do by way of credit enhancing
- 38:48 sovereign obligations. That is, in my mind, a very different subject from the one we talked about
- 38:56 earlier, where the sovereign or a state owned enterprise is pledging assets or revenue streams
- 39:04 or forward selling those revenue streams. The issue, David, that you raised,
- 39:11 can the IFIs appropriately price or assess the value of their credit enhancement? You
- 39:19 remember what happened in the Brady transactions. There were no guarantees by the official sector.
- 39:28 What happened was the IMF and the World Bank lent money to the debtor countries, and that money was
- 39:34 used to buy zero coupon US Treasury obligations that matured in 30 years and were pledged to
- 39:43 secure the principle repayment on the Brady bonds. The World Bank has dipped its toe into this river
- 39:52 several times. For example, it issued a partial guarantee of a bond of Ghana, I think in 2012.
- 40:02 The question that we've always had is, what is the best structure for putting partial credit
- 40:12 enhancement of an IFI on a dead instrument so that we can predict how the market will value that? You
- 40:23 see, it ought to be possible to sit down and say, these are the terms the sovereign could borrow
- 40:31 unsecured or un-credit enhanced. These are the terms that it will get if it has
- 40:38 the credit enhancement. And if it turns out that it is appropriately valuable, then that
- 40:46 becomes a sensible thing for an IFI to do. One other comment. There is a rigidity
- 40:54 in at least the World Bank's approach to this. The World Bank will treat a partial guarantee,
- 41:01 a contingent liability, they will score it as though it were a direct loan. So to the extent
- 41:09 the country has a certain allocation, a certain borrowing capacity from the World Bank, they'll
- 41:15 use it up by asking for a partial guarantee, even though that guarantee may never be called.
- 41:29 I can't hear you, David. [David Malpass]
- 41:32 Without that, there's the problem or the challenge.
- 41:36 The World Bank and other IFIs have preferred creditor treatment, meaning the whole world has
- 41:42 agreed to the idea that these are senior or special creditors within the environment,
- 41:48 and so that makes it extra hard to do, and so that's how we score the partial
- 41:54 guarantees. Let me turn to Paul for comments on any and all of these topics.
- 41:59 [David Gruenwald] A couple of comments, David. First, while
- 42:01 Lee was talking about Brady bond restructurings and I was having a flashback to my IMF days with
- 42:07 par bonds and discount bonds and Flurbs. That sort of collateral is going to be expensive now,
- 42:12 right? Because interest rates are so low. Rates were higher and prices were lower for those bonds
- 42:17 back in the '80s when we were using those. And also comment on what Carmen said about state
- 42:22 contingent debt structures. Obviously, there are good and less good state contingent
- 42:30 specifications. So the idea there, she correctly said, was around risk sharing.
- 42:34 But I wanted to come back to something that Joyce said earlier.
- 42:38 She touched very briefly on ESG and the term in a larger context of debt. Just to point out that
- 42:47 ourselves at S&P and a lot of other people in the market are doing a lot of work toward ESG
- 42:53 scoring. We have a legacy business, as everyone knows, for providing credit ratings. But the newer
- 43:00 business, which is getting an enormous push, is to put some sort of ESG score on entities as
- 43:07 well. The market is trying to converge toward some sort of common framework aligned with the public
- 43:13 sector as well. We're obviously not there yet. But I'm wondering just maybe for the panel as
- 43:17 a whole, does that figure into the debt framework here? I've got my economist hat on. I'm not going
- 43:25 to pretend to be a rating analyst. If we've got some sort of collateralization loosely defined
- 43:31 and we know that some of the natural capital is located in some of the high debt countries,
- 43:37 does that figure into the mix going forward as we're talking about securitization or collateral
- 43:43 or other things? Or is that a separate issue that we can always keep off to the side?
- 43:47 I would love to hear views on that. [David Malpass]
- 43:49 Let's do that topic. So green bonds are important, and then the transparency of how they're evaluated
- 43:55 becomes very important in this meaning. What describes a green bond? There's different views
- 44:01 in the community of what qualifies as a green bond. Columbia recently did a bond that was,
- 44:08 I don't want to use the term collateralized, but Paul, I think we should say bonds that have
- 44:16 extra value, let's say, because of an ESG. [David Gruenwald]
- 44:20 Better terminology. Let's use that one. [David Malpass]
- 44:22 Because I want to reserve the term collateral. Lee did a good job for dividing this up into credit
- 44:30 enhanced debt that are from the creditor side, and then a locking up of assets or future sales as the
- 44:37 use of the term collateral. But what Columbia did was said it would protect, it's like collateral,
- 44:43 but let's call it extra value. They issued a bond that was attached to protecting some
- 44:53 huge amounts of land in Columbia. One of the challenges for the world here is it was only
- 45:00 seven basis points improvement in the yield. So it was a 7% bond that came in at 6.93%. Seven basis
- 45:09 points is a small fraction of the total yield or coupon on the bond. So it wasn't much of a
- 45:20 premium. So let's talk about ESG. Joyce, comments? [Joyce Chang]
- 45:27 There were a couple of transactions that have come out. The Belize Blue Bond
- 45:31 is another one that recently came out. There are different criteria, but if you look at this B3W,
- 45:38 the Build Back Better World, they are talking about the development finance corporation actually
- 45:44 being able to take a first loss and being able to use more credit enhancement. So that discussion is
- 45:50 happening at that level. But the Belize Blue Bond is another level. If you just take a look at the
- 45:56 green bonds this year, there's a tremendous amount of investor demand. Year to date,
- 46:01 there's been $360 billion of issuance of green bonds. For all of last year, it was $300 billion.
- 46:07 So I think there really is room for innovation here, just given what the investor demand is,
- 46:12 some of the requirements also to demonstrate that you're in these instruments, and looking at
- 46:17 creative ways in which this could be structured. [David Malpass]
- 46:22 How do you do transparency? I saw the article in the front page, big one,
- 46:26 in the Washington Post yesterday saying the data is all... Well, I forget the headline,
- 46:33 but it was that there are huge problems in the data collection. The World Bank Climate Change
- 46:39 Action Plan that we did in April, a central point of that is the need for diagnostics as far as what
- 46:45 the actual greenhouse gas emissions are from a given activity, or what the size of the problem
- 46:52 is in various parts of the climate space. But the Washington Post article yesterday took note
- 47:01 that it's very difficult to do transparency in this field. Joyce, any thought on that?
- 47:06 [Joyce Chang] No. The transparency,
- 47:09 that's why I really do applaud the World Bank's debt transparency report, and also just all the
- 47:14 work that Carmen has done for just decades about this topic. And also trying to look at something
- 47:18 really complicated, like China's debt transparency and how we look at the hidden debt. It is really
- 47:25 difficult. A lot of the ESG issues that we work on are just very hard to quantify, period.
- 47:33 Whether we're talking about the issues related to debt, or we're even trying to forecast out about
- 47:40 government programs and what the realistic way is to measure pricing, the cost of decarbonization,
- 47:46 and other metrics. So I think this problem is not going to go away. It identifies the
- 47:53 biggest risk you have with the ESG is that it's been very hard to standardize anything
- 47:57 and put this into a standardized contract. [David Malpass]
- 48:01 We may want to save this topic for another panel. I want to gradually bring us to
- 48:08 the Common Framework and the actual challenge at hand, this huge amount of debt on the developing
- 48:14 countries and especially the poorer countries, and how do we restructure it. Carmen, thoughts
- 48:19 at large or questions, either one? [Carmen Reinhart]
- 48:26 Let me start with the transparency and the Common Framework. I think one area where the
- 48:40 multilaterals can play a big role also is actually on the setup of transparency. Transparency is
- 48:48 not going to bring about automatically creditor agreement. That's pie in the sky. But for creditor
- 48:58 committees to actually come in with more a cohesive view of what the actual liabilities are,
- 49:08 what the contracts look like, is at a minimum. And here, I will defer to Lee, who is infinitely the
- 49:18 authority on this. But I think as a minimum starting point, starting the discussions
- 49:26 from a common ground on who is owed what and what the terms are is a minimum minimorum core.
- 49:34 But let me say that on the Common Framework, I think it's a necessary first step. It's necessary
- 49:44 in two ways. One is, it is a recognition that the problem for many low income countries, and indeed
- 49:54 for not an unsubstantial number of middle income countries, has to do less with liquidity,
- 50:02 but more also with solvency. So you have to move from the DSSI COVID emergency
- 50:14 to something that actually delivers some debt relief.
- 50:20 Having said that, what I think the Common Framework has done
- 50:25 is basically transfer the Paris Club to the G20 so that the non-Paris Club members,
- 50:35 China, Saudi Arabia, UAE and other non-Paris Club creditors, are part of the discussion. Perhaps I'm
- 50:50 being overly pessimistic, but let me say that I recently did a study called Sovereign Bonds Since
- 50:58 Waterloo. The chronic common theme is creditors want to be repaid in full, debtors want a haircut
- 51:11 because they perceive their ability to pay as impaired. And so getting those two sides together,
- 51:19 which is the task we have ahead of us, getting those two sides together
- 51:24 has historically taken a long time. Things like the Brady Plan that Joyce mentioned,
- 51:35 that came a lot later. That came years after the onset of crisis. So I think our main
- 51:43 task would be to try to expedite what has been usually a very long process. Let me stop there.
- 51:50 [David Malpass] Great. I'll come to Lee for an answer to that,
- 51:53 but I want to pick up on one thing you said. The inconsistency, or I think there's a third problem,
- 52:00 it's that the creditors want to be paid in full, the debtors would like a haircut. But the people
- 52:07 of the developing country need the advancement, and so I want to make it more of a triangle.
- 52:14 There's the interest of the governments of the borrowing country, the entrance of the creditors,
- 52:21 and then it's a little bit separate, the people of the country. Because if I'm the government
- 52:26 of a poorer country, I'm happy to sign away the rights to oil or to cobalt or other things for
- 52:32 20 years because I won't be around for 20 years. I just want things to go well over the next four
- 52:38 years. And if someone comes in and says they'll build roads and they'll pay people a stipend
- 52:45 for the four years, then I'm willing to sign away a lot of future value in order to get that. So I
- 52:51 really think we have to take into account the different interests of the people of the poorer
- 52:58 countries as their governments sign contracts. That's really the core of why we need full
- 53:04 transparency. Unless you know what's in the contract, no one is in a position to actually
- 53:10 evaluate the people's interest of the country. I want to come to Joyce. Joyce raised, at one
- 53:19 point, the need for the private creditors to see the information from the official analysis that's
- 53:29 done. This is a practical issue in Chad, for example, because Chad asked for Common Framework
- 53:37 treatment. The Common Framework is something offered by the G20. They wrote it down. It's in
- 53:46 the communiqué. It says that private sector creditors should, and I guess are urged,
- 53:55 to participate in the debt reduction for Chad on the IMF and World Bank view that Chad is
- 54:02 has an unsustainable amount of debt. It was taken on by previous governments and it's very large. So
- 54:09 the idea is how do you provide debt relief on a comparable treatment basis?
- 54:14 I think Joyce was saying that the official sector needs to share the information
- 54:19 with the private sector, maybe not in Chad, but in the general case. So I want to ask Lee about that.
- 54:27 And then some of the things we're pushing for in the Common Framework are one, that it operates
- 54:33 faster, which goes to Carmen's point. There needs to be some kind of speed to it. Two, that
- 54:38 there'd be comparable treatment among the various creditors. Three, that we consider a standstill
- 54:44 on payments to creditors in order to expedite or to facilitate the process of restructuring or of
- 54:51 debt relief within the country. And four, that there be clarity on, it's called the
- 54:59 urging to the private sector to participate and to China's various entities to participate. So Lee,
- 55:05 can you unpack all of this for us? [Lee Buchheit]
- 55:10 A little bit of it, David. Look, the Common Framework, to the extent that
- 55:16 it brings into the tent traditionally non-Paris Club creditor countries like
- 55:22 China and India and Saudi Arabia, I think is an altogether commendable thing. In the past,
- 55:28 a sovereign debtor had to negotiate with the Paris Club, with non-Paris Club bilaterals,
- 55:35 and with commercial creditors separately. This is an effort to streamline that.
- 55:43 It was one year ago that the G20 announced the Common Framework. Three countries signed up
- 55:51 pretty quickly in the early part of this year. To my knowledge, we've not seen the bilateral
- 55:59 creditor committees for any of these countries come out with debt restructuring terms. Now that,
- 56:05 to my mind, is absolutely inexplicable. It isn't that hard. Now, you might say,
- 56:12 well, we've had this extraordinary boom in commodity prices. And so
- 56:19 in oil in the case of Chad, copper and the case of Zambia, that some might say have rendered the debt
- 56:26 sustainability analysis that were prepared earlier this year by the IMF obsolete. Okay, okay. But
- 56:35 we've not seen an announcement of debt restructuring terms, and therefore, the issue
- 56:41 that Carmen raised, the so-called comparable treatment on the part of private sector,
- 56:49 we haven't actually had an opportunity to pursue that. One or more of these countries are going to
- 56:57 have to announce debt restructuring terms, and then we will see whether the private creditors
- 57:03 are prepared to provide comparable debt relief and I don't want to prejudge where that comes out, but
- 57:15 the disappointment with the common framework, I think,
- 57:19 is principally the fact that it has not produced, yet, a single debt restructuring.
- 57:31 To the extent that many people put a great deal of significance in the common framework and the
- 57:42 collection of bilateral creditors into a single negotiating forum, the fact that it's not
- 57:49 produced anything really is a disappointment. On your point, David, what you have proposed,
- 57:58 a debt suspension during the common framework negotiations, I think is a very good idea. What
- 58:04 it effectively does is extend the DSSI for those countries that ask for a common framework debt
- 58:14 restructuring during that period. It will both motivate the creditors and the debtor.
- 58:24 It motivates the debtor because you do extend the DSSI suspension and that will, I think, induce
- 58:35 more countries to ask for a common framework debt restructuring, rather than put it off.
- 58:41 It also motivates the creditors because they will not be receiving debt service payments during the
- 58:48 negotiation period and therefore they will want to get on with the negotiation, so that is all good.
- 58:55 One final comment, but you've said it a couple of times, David, you used the phrase debt reduction.
- 59:05 Remember that the common framework had a sentence which said, that debt reduction,
- 59:12 debt cancellation, debt write-offs, are to be considered only in the most extreme cases
- 59:19 and so it is not clear to me whether these bilateral creditor committees will be proposing
- 59:25 principle haircuts as part of these debt restructurings or whether it will simply
- 59:31 be a maturity extension, maybe some interest rate relief, but I fear it will be the latter
- 59:38 and for many countries, as Carmen says, it is not a liquidity issue, it will be a solvency issue.
- 59:46 [David Malpass] Yeah, there's a real world consequence to
- 59:50 this, that people should be aware of, that in the midst of the pandemic, even the poorest countries
- 59:55 are basically paying every month or every quarter to creditors in wealthier countries,
- 01:00:02 generally in much wealthier countries, with no actual prospect of that changing.
- 01:00:10 World Bank works very closely with the IMF. We've discussed this jointly with the G7 and with the
- 01:00:16 G20 and I explained to the G20 leaders just over the last two weeks, that the process is fully
- 01:00:23 stalled and we've made suggestions on ways that it could be reignited or made more effective.
- 01:00:31 President Biden was in both Glasgow and Rome and so meetings there in the us has been strongly
- 01:00:38 supporting the idea of transparency, so I really welcome that. I think that's a critical part of
- 01:00:44 this in order to move it along because then you can take into account the fuller value of the debt
- 01:00:51 and you're working with better information. As a by the way for people, for Chad, it took almost a
- 01:00:58 year to reconcile the amounts of debt. Meaning normally in a bankruptcy committee process for
- 01:01:04 private sector creditors, they share information and can quickly figure out who has owed money in
- 01:01:09 which kinds of forms, but for Chad, a very poor country, going through difficult circumstances.
- 01:01:19 It took the creditors a year to figure out how much they thought each were owed. As Joyce maybe
- 01:01:27 indicating, this information is not always shared very fast with the private sector creditors,
- 01:01:32 so it makes it difficult to actually get to an end point in some kind of debt relief process.
- 01:01:41 My endpoint on this is, the real world consequence is, just speaking of the low income countries,
- 01:01:50 $860 billion of debt in the midst of the pandemic, almost all of which or the vast majority of which,
- 01:01:59 is getting serviced regularly by the poorer country. The World Bank puts in huge amounts
- 01:02:04 of grants and zero interest rate loans to the countries and the money turns around
- 01:02:10 and goes to creditors in a lot of cases. We're facing that and we're just strongly
- 01:02:15 encouraging the world towards some kind of process to break the spiral that's occurring.
- 01:02:25 Any other comments and then I'm going to read questions from the audience.
- 01:02:31 Does anyone have want to intervene right now?
- 01:02:40 Okay then, I'm going to ask a question. Let's talk about the debt itself, the amount. The
- 01:02:56 World Bank has a report out and let me put this to Carmen. Which parts of the world are responsible
- 01:03:04 for publishing information about that and is that process working pretty well? I bet S&P,
- 01:03:11 maybe Paul will comment on that, but who publishes data and who arbitrates that publication? I know
- 01:03:17 you're famous in this field, Carmen. [Carmen Reinhart]
- 01:03:22 David, historically on external debt, the World Bank, in the debt reporting system, has had
- 01:03:36 the longest, most established history and I don't say that because this is a World Bank conference.
- 01:03:43 This has been the norm for decades. However, I think a big challenge on… There are also series
- 01:03:59 that the governments themselves publish, there are also alternative series, that academic studies and
- 01:04:08 other agencies publish. I'm going to speak to that in a minute because I think it's very relevant to
- 01:04:17 the transparency to discussion we've been having, but one of the elements of the more
- 01:04:30 recent challenge, is that as borrowing becomes more complex, more borrowing of governments is
- 01:04:39 state owned enterprises, more borrowing of governments are special purpose vehicles.
- 01:04:48 Also more borrowing of governments is domestic debt. It's really important for governments to
- 01:04:54 have consolidated public sector accounts. In a recent survey we did at the Bank,
- 01:05:02 it shows that 54% of the respondents do not have consolidated fiscal accounts and so
- 01:05:13 what I'm saying is, getting an overall public sector indebtedness picture that also includes
- 01:05:21 new types of debts, from central banks, swap lines or government deposits
- 01:05:29 or repos and other instruments that have become part of the new public debt universe, that's
- 01:05:40 become increasing important, but at the same time, many, many governments don't provide it.
- 01:05:46 In answer to this question, I would say that we are at a critical juncture and
- 01:05:52 very much this is also in the spirit of the report, which gives a list of recommendations
- 01:05:59 of what to do to improve transparency. I think the multilaterals also have to go
- 01:06:07 beyond, much, much, much beyond going receiving data from the governments themselves,
- 01:06:16 which may be imperfect either because they don't have consolidated accounts
- 01:06:20 or because of disclosure requirements that they do not disclose the debt to go to other sources,
- 01:06:30 sources from the market sources from academia. I think a big push forward on the getting better
- 01:06:39 debt data than the one say, historically, there is the World Bank, BIS, IMF, data hub, going beyond
- 01:06:51 that to draw on other sources, is going to be increasingly important because of all these other
- 01:06:58 types of borrowing that are comparatively newer. [David Gruenwald]
- 01:07:03 Yeah, David, let me second that. The S&P sovereign team doesn't have a crystal ball, so
- 01:07:10 we use the same data sources as anyone else and when we go visit a country,
- 01:07:15 it's almost like a mini-IMF article IV mission. We send a team out there, we get the official data,
- 01:07:21 we talk about macro policies, we look at the debt and as Carmen says, sometimes due to capacity
- 01:07:26 constraints or other reasons, that debt is not complete and then we go to alternative sources,
- 01:07:32 but I think we would definitely support any effort to increase debt transparency
- 01:07:37 and let the sovereign teams do their job. The world's moving quickly, not just with
- 01:07:43 some of the contingent liabilities and off balance sheet stuff that Carmen talked about. We've got
- 01:07:48 these global digital actors now and we're going to be increasingly in a world where we've got a
- 01:07:52 lot of digital debt with smart contracts and a lot of things that are going to be customized and not
- 01:07:59 homogeneous and tough to aggregate and tough to do under surveillance regimes. I think staying ahead
- 01:08:07 of that game's going to be increasingly difficult, but again, we're using the same tool kit as the
- 01:08:13 IFI's and I think we would definitely support all the improvements that we're discussing today.
- 01:08:19 [David Malpass] Super. We've got about five minutes
- 01:08:21 left. I wonder if we can focus on... The question is on collective action clauses. Did they work?
- 01:08:28 Are they working and are there ways to extend them and are there other ways to improve the system?
- 01:08:36 This is kind of a forward leaning question. I want to ask, I guess, Lee and Joyce on that. Well,
- 01:08:42 Joyce first. Did collective action clauses work and are there ways that those could extend into
- 01:08:50 other kinds of contracts? [Joyce Chang]
- 01:08:53 I think the collective action clauses were a real success and we can talk more about this. I would
- 01:08:59 just say, the fix for contractual loopholes is not to tinker further with the bond contracts
- 01:09:07 because there are always very clever lawyers on the other side. I think it is really to simplify
- 01:09:13 and try to standardize bond contracts, rather than to make them more complicated,
- 01:09:18 but I also just wanted to add the point on the debt transparency. The world that the official
- 01:09:24 creditors really have just been stalwart at, has been a lot of the technical assistance,
- 01:09:30 whether it's from the IMF or the World Bank. I think on this whole issue of
- 01:09:34 debt transparency and consolidation of debt, accounts and reporting of it,
- 01:09:39 it seems to me like we've had these discussions, well, what exactly can the official creditors do?
- 01:09:43 There's a line on how you can use guarantees and all of that is understandable. To me the
- 01:09:48 technical assistance piece of it has always been critical to the private sector in the
- 01:09:54 debt restructuring, whether it was the lowest income countries or whether it was the Eurozone,
- 01:10:02 in the IMF examples with Greece. I think that the technical assistance,
- 01:10:07 I wouldn't downplay just the credibility that the official creditors have and the way that
- 01:10:12 they can access this and put all of the brain power to is something that is really unique
- 01:10:19 and valuable and I think can really help in these discussions, in making sure that people are using
- 01:10:25 this uncommon information that's transparent. I would just say collective action clause is a
- 01:10:30 success, but simplifying consistency in the bond contracts. Standardization, I think, is key.
- 01:10:41 [David Malpass] There has been mention today the
- 01:10:45 Greece issue and the central bank swaps. DRS is trying to comprehend the effective options and
- 01:10:55 the central bank swaps have been included in the World Bank's DRS as a form of debt.
- 01:11:04 Our reports now use the concept of debt-like instruments in order to get broader view. Lee,
- 01:11:11 any final thoughts on either, on the simplification of the bond contracts,
- 01:11:17 as Joyce mentioned or on collective action clauses or on what governments could do to make
- 01:11:23 this process work better? Maybe the UK government or the US government. Any thoughts in that area?
- 01:11:30 [Lee Buchheit] I'm entirely with Joyce. Collective action clauses
- 01:11:36 have been a considerable advance and they have helped achieve orderly sovereign debt workouts
- 01:11:45 over the last 10 years. Most recently, a few weeks ago in Belize, where Belize used its collective
- 01:11:54 action clause in its international bonds in order to achieve a retirement of those bonds,
- 01:12:01 but only up to a point. The collective action clauses are only in bond contracts. You don't
- 01:12:09 even find them in syndicated loan agreements. They are not a panacea,
- 01:12:15 as we saw in Greece in 2012. Greece had 35 English law bonds, each with a collective action clause.
- 01:12:24 Only 17 of those series of bonds joined the restructuring. They are not a panacea
- 01:12:30 and the market has adapted to them so that determined holdout creditors can
- 01:12:36 get blocking positions in the bonds and thereby stymie the use of a collective action clause.
- 01:12:44 The question is, do we do anything more? There are those who are arguing, David, as you have just
- 01:12:53 alluded to, that we should resurrect the idea of a statutory sovereign debt restructuring mechanism,
- 01:13:02 perhaps not as aggressive as the sovereign debt restructuring mechanism the IMF proposed in 2002,
- 01:13:12 but some statutory intervention, at least in the jurisdictions like the United States and the UK,
- 01:13:21 where most of the cross border emerging markets sovereign debt obligations are governed.
- 01:13:29 Difficult because it obviously is a political decision, but not impossible and the UK did
- 01:13:37 something like this, a modest measure back in 2010, in the context of the HIPC Initiative. I
- 01:13:46 think there are other things that one could do, but probably that's another phone call.
- 01:13:53 [David Malpass] Lee, that that was great.
- 01:13:57 We have the hook too close. This was a really great panel, raised a lot of issues that we can
- 01:14:04 focus on. Just to close, I think because we don't have a fix for all of this and there is
- 01:14:14 a joint interest between creditors, between the governments of the debtor countries and
- 01:14:19 between the people of the debtor countries in getting new investment, everyone has, in a way,
- 01:14:25 worked together on this to make it better going forward, so that's the point of our transparency
- 01:14:30 report. It's called Debt Transparency and it's on the World Bank web site. I want to greatly thank
- 01:14:38 Carmen Reinhart, my colleague at the World Bank and chief economist here, Lee Buchheit, Joyce
- 01:14:43 Chang and Paul Gruenwald for the great panel. Thank you everybody. I'll say goodbye. Thanks all.
- 01:14:52 [Lee Buchheit] Thanks everyone.
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Senior Debt Specialist, Macroeconomics, Trade & Investment, World Bank
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Former Senior Vice President and World Bank Group Chief Economist, Development Economics -
Honorary Professor, University of Edinburgh Law School -
Global Chair of Research, J.P. Morgan -
Global Chief Economist, S&P Global Ratings -
Chief Economist of the World Bank Group and Senior Vice President for Development Economics
