Debt Transparency in Developing Economies

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Debt Transparency in Developing Economies

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Debt in emerging markets and developing economies has surged to a record high since the outbreak of COVID-19, but new analysis from the World Bank Group shows that the global and country-by-country systems for tracking it are proving to be grossly inadequate.

High debt and inadequate debt transparency in poor economies are closely intertwined. Policymakers can no longer afford to be complacent about either. The World Bank report is the first comprehensive assessment of debt transparency in these economies—and it offers a roadmap for policymakers on how to close gaps in debt transparency.

See the list of speakers ˅

00:00 Welcome and introductory remarks
05:36 Panelist introductions and context for the discussion
08:20 Transparency and the private sector
10:45 Collateralized debt and implications
14:27 Debt disclosure gaps and sovereign ratings
18:08 Hidden debt
23:09 Challenges with addressing unsustainable debt at the global level
26:23 China’s role as a lender to emerging market and developing economies
32:33 Credit enhancement
41:55 Environmental, Social, and Governance (ESG) scoring and green bonds
48:05 The Common Framework and the challenges ahead
1:02:51 Audience Q&A
1:14:00 Closing remarks

Read the transcript


  • 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 and Investment, World Bank
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